Business Valuation Myths
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Business Valuation Myths

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Common myths about valuing businesses.

Common myths about valuing businesses.

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Business Valuation Myths Presentation Transcript

  • 1. SPECTRACOM HOLDINGS BUSINESS VALUATION SERVICES BUSINESS VALUATION MYTHS quot;HELPING BUSINESS OWNERS AND THEIR ADVISORS DETERMINE BUSINESS VALUE“ Since 1983
  • 2. 90 80 70 60 50 40 30 20 10 0 1 2 3 4 5 Value Cash Flow Power (Cash Flow)
  • 3. Valuing my business using the common earnings multiplier of my industry will give me the best estimate of value for my business. 90 80 70 60 50 40 30 20 10 0 1 2 3 4 5 Value Cash Flow Power (Cash Flow)
  • 4. This is probably the most common myth. While this method can produce an estimate of value, it does apply universally to all businesses within the same industry. For example, a Mexican venue restaurant located on a signalized corner is going to have a higher value than the same type of restaurant located at the back of a shopping center that has no visibility from the street. Other factors of value will also have an impact on the value of similar businesses within the same industry. Further, in the case where the valuation is going to be reviewed by a third party -- IRS, banks, courts, trustees, and other interested parties -- industry multiples are not commonly accepted in determining value. 90 80 70 60 50 40 30 20 10 0 1 2 3 4 5 Value Cash Flow Power (Cash Flow)
  • 5. Once I have an appraisal done the value will remain constant from year-to-year or period-to-period. 90 80 70 60 50 40 30 20 10 0 1 2 3 4 5 Value Cash Flow Power (Cash Flow)
  • 6. Businesses by their very nature are dynamic, not static. Consequently, market, industry, economic, and internal operating characteristics will change over time, thus changing value 90 80 70 60 50 40 30 20 10 0 1 2 3 4 5 Value Cash Flow Power (Cash Flow)
  • 7. Appraisal methods and approaches produce an absolute value. 90 80 70 60 50 40 30 20 10 0 1 2 3 4 5 Value Cash Flow Power (Cash Flow)
  • 8. The truth is, if you were to have three different analysts value the same business, all three will come up with a different value. That is because each analyst may use different methods and approaches to estimating the value. Even in cases where the analysts use the same valuation method, deviations in discount rates, risk assessment, and other variables will result in disparate values. However, if the analyst adheres to sound valuation industry standards, methods, approaches, and protocol a reasonable estimate of value can be reached. 90 80 70 60 50 40 30 20 10 0 1 2 3 4 5 Value Cash Flow Power (Cash Flow)
  • 9. I can just have my regular accountant, attorney, or financial planner conduct the valuation of my business. 90 80 70 60 50 40 30 20 10 0 1 2 3 4 5 Value Cash Flow Power (Cash Flow)
  • 10. While these professionals seem like a good resource for assessing the value of your business, they may not be equipped with either the skill, qualifications, or experience to conduct the valuation process properly. Even if they do have proper credentials for valuing your business you may want to reconsider having them perform the valuation. The reason you may not want them to perform the valuation is due to a conflict of interest, since they will have an on-going interest in your business after the valuation study is completed, so there is a likelihood the value they derived for your business is biased, either high or low in favor of what you are hoping the outcome will be (even if you value their integrity and professionalism). 90 80 70 60 50 40 30 20 10 0 1 2 3 4 5 Value Cash Flow Power (Cash Flow)
  • 11. Financial data of the company alone is sufficient to determine value. 90 80 70 60 50 40 30 20 10 0 1 2 3 4 5 Value Cash Flow Power (Cash Flow)
  • 12. While a company's financial data is the most critical component for deriving value, there are many other factors that affect value. As alluded to earlier, market, industry, economic, competitive conditions, organizational structure, management skill, characteristics of the facility, age of product/service lifecycle, business location (for some types of businesses), as well as a host of other factors can affect the value of an enterprise. 90 80 70 60 50 40 30 20 10 0 1 2 3 4 5 Value Cash Flow Power (Cash Flow)
  • 13. As you have probably concluded by now, these and other myths of valuing a business often get in the way of sound judgment in determining value; and, taking the wrong approach on valuing your business can cost you a lot whether you are selling your business, settling a divorce or law suit, constructing a partnership buy/sell agreement, obtaining financing for your business, or any other purpose for which a business valuation can be a critical tool. 90 80 70 60 50 40 30 20 10 0 1 2 3 4 5 Value Cash Flow Power (Cash Flow)
  • 14. Spectracom Holdings is a professional business valuation firm. Specialization: All business valuation issues, except ESOPs  Geographic Area: National, England, Australia, &Asia  Client Demographics: Small to medium sized businesses (Max.  annual revenues of $50 million). Industries: All industries, except bars, liquor stores, adult  entertainment, and churches 90 80 70 60 50 40 30 20 10 0 1 2 3 4 5 Value Cash Flow Power (Cash Flow)
  • 15. Spectracom Holdings 4120 Birch St., Suite 106 Newport Beach, CA 92660 Tel: 877-660-2895 Email: info@SpectracomHoldings.com Website: www.TheValuationAdvisors.com Blog: http://businessvaluationservices.wordpress.com Professional Profile: www.LinkedIn.com, search Jim McCune, Owner, Spectracom Holdings 90 80 70 60 50 40 30 20 10 0 1 2 3 4 5 Value Cash Flow Power (Cash Flow)