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THE ABC’S OF BUSINESS
VALUATION
Jim Turner, C.P.A. CVA
Turner Business Appraisers & Advisors
SEMINAR OBJECTIVES


You will learn how to utilize the 3 established
approaches to value a business and we will estimate ...
BUSINESS VALUATION & THE BABY BOOMERS



75 Million baby boomers



7 Million own privately held businesses



It is fo...
United States birth rate (births per 1000 population). The red
segment from 1946 to 1964 is the postwar baby boom.[2]
WHY VALUE A BUSINESS?


Buy/Sell decisions



Gift or Estate Tax (IRS)



Shareholder actions



Equitable distributio...
WHO ARE THE EXPERTS


ABV = Accredited in Business Valuation



CVA = Certified Valuation Analyst is a CPA, MBA, Ph.d
or...
APPROACHES TO VALUING A BUSINESS
The established approaches to value IRS Revenue
Ruling 59-60
 Income Approach
 Market A...
SAMPLE BUSINESS VALUATION


Purpose of the valuation – The owner is
contemplating selling the business; so he wants to
kn...
THE AMERICAN DREAM
Living the
Dream!

OUR ENTREPRENEURS
SAMPLE BUSINESS VALUATION
SAMPLE BUSINESS VALUATION
SAMPLE BUSINESS VALUATION
INCOME APPROACH
SAMPLE BUSINESS VALUATION
IBBOTSON BUILD-UP METHOD

Source: 2013 Ibbotson® Stocks, Bonds, Bills and Inflation Valuation Ye...
SAMPLE BUSINESS VALUATION
INCOME APPROACH
SAMPLE BUSINESS VALUATION
MARKETABILITY DISCOUNT (INCOME
APPROACH)
SAMPLE VALUATION MARKET APPROACH
PRATTS STATTS® DATABASE
SIC:5812/NAICS:722515
SAMPLE VALUATION MARKET APPROACH
SAMPLE VALUATION ADJUSTED
NET ASSET VALUE APPROACH

The appraised fair market value of the equipment was $60
SAMPLE BUSINESS VALUATION


Summarized results table

Based upon the results of the 3 approaches to value;
our opinion of...
SANITY TEST
SANITY TEST CONTINUATION
USING RULES OF THUMB
RULES OF THUMB


The single best source for rules of thumb for small
business is the, “Business Reference Guide,”
publish...
RULES OF THUMB


Restaurants --- Limited Service (NAICS 722211)


Rules of Thumb
30 to 40 percent of annual sales for in...
RULES OF THUMB

*Rule of Thumb #1 is
in harmony with the
results of the income
approach and our
opinion of value $1,500.
PART II – THE FUTURE AFFECTS
VALUE TODAY
INDUSTRY INDICATORS


US consumer spending on services, a measure of
demand for specialty eateries, rose 1.9 percent in
A...
INDUSTRY GROWTH FORECAST

First Research forecasts are based on INFORUM forecasts that are licensed from
the Interindustry...
FEDERAL RESERVE BEIGE BOOK


Fifth District--Richmond Beige Book -- October
16, 2013



District economic conditions imp...
NORTH CAROLINA ECONOMIC OUTLOOK
SUMMER 2013


Executive Summary: A Return to Growth, and the Old
Issues



Economic impr...
CHARLOTTE MSA ECONOMY


The Charlotte-Concord-Gastonia area economy grew by
nearly five percent in real terms in 2012 mak...
THE ABC’S OF BUSINESS VALUATION SAMPLE
#2


What if the business is expected to experience
revenue and profit growth in s...
SAMPLE-2
WITH 4-5% ANNUAL GROWTH
SAMPLE -2
DCF WITH FORECASTED 4-5 %
ANNUAL GROWTH RATE
PART III – “APPLES TO APPLES ”
COMMON SIZE ANALYSIS
COMMON SIZE BALANCE SHEET

*Source: https://www.profitcents.com/USEN/runreport/generatereport.aspx?GUID=40b10acb-4149-4d43...
COMMON SIZE INCOME STATEMENTS

*Source: https://www.profitcents.com/USEN/runreport/generatereport.aspx?GUID=40b10acb-4149-...
Checking the pulse of a
business: Key Financial
Ratios
LIQUIDITY
A measure of the company's ability to meet obligations
as...
= (Cash + Accounts Receivable) / Total Current Liabilities
PROFITS & PROFIT MARGIN
A measure of whether the trends in profit are favorable
for the company.
= Gross Profit / Sales
ASSETS
A measure of how effectively the company is utilizing
its gross fixed assets.
= Net Income / Total Equity
OVERVIEW OF I&N, LLC.
RATIOS COMPARED TO INDUSTRY PEERS

Rating

Metric
LIQUIDITY

PROFITS &
PROFIT MARGIN
SALES
BORROWING...
PART IV – “NORMALIZING” IS AN
EFFORT TO ADJUST TAX OR GAAP
BASIS FINANCIALS INTO ECONOMIC
REALITY
It is widely accepted th...
SAMPLE #3
NORMALIZING ADJUSTMENT TO OWNERS
COMPENSATION
NORMALIZED NET CASH FLOW
SAMPLE #3
CAPITALIZATION OF EARNINGS METHOD W/WAGE
NORMALIZING
CONCLUSION
Fifty-one percent is usually one-hundred percent
better than forty-nine percent.
 Peanuts, popcorn, cotton-can...
OUR
ENTREPRENEURS
AFTER THE SALE
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The ABC's of Business Valuation

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Presentation given by Jim Turner, CPA and President of Turner Business Appraisers for as part of South Piedmont Community College's Small Business Center Continuing Education Workshops. This presentation was given on valuing a small business.

Published in: Business, Economy & Finance
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The ABC's of Business Valuation

  1. 1. THE ABC’S OF BUSINESS VALUATION Jim Turner, C.P.A. CVA Turner Business Appraisers & Advisors
  2. 2. SEMINAR OBJECTIVES  You will learn how to utilize the 3 established approaches to value a business and we will estimate the value employing a good rule of thumb  By the end of our session you will understand the basic steps required to calculate the value of a business….Valuation is both an Art and a Science  We will discuss the nuances of valuing businesses; including marketability discounts, normalizing adjustments and the concept of control
  3. 3. BUSINESS VALUATION & THE BABY BOOMERS  75 Million baby boomers  7 Million own privately held businesses  It is forecasted that between 1.36 and 2 million firms will be for sale in the next five to ten years
  4. 4. United States birth rate (births per 1000 population). The red segment from 1946 to 1964 is the postwar baby boom.[2]
  5. 5. WHY VALUE A BUSINESS?  Buy/Sell decisions  Gift or Estate Tax (IRS)  Shareholder actions  Equitable distribution  Key man or Key Woman Life insurance
  6. 6. WHO ARE THE EXPERTS  ABV = Accredited in Business Valuation  CVA = Certified Valuation Analyst is a CPA, MBA, Ph.d or Degreed Financial Professional  ASA = An Accredited Senior Appraiser
  7. 7. APPROACHES TO VALUING A BUSINESS The established approaches to value IRS Revenue Ruling 59-60  Income Approach  Market Approach  Asset Approach Sanity Check/Quick estimate  Rules of thumb
  8. 8. SAMPLE BUSINESS VALUATION  Purpose of the valuation – The owner is contemplating selling the business; so he wants to know the fair market value of the business in exchange  Common deal terms of a small business transaction  Asset Sale Includes: Equipment, inventory and goodwill  Does not include: Cash or accounts receivable 
  9. 9. THE AMERICAN DREAM
  10. 10. Living the Dream! OUR ENTREPRENEURS
  11. 11. SAMPLE BUSINESS VALUATION
  12. 12. SAMPLE BUSINESS VALUATION
  13. 13. SAMPLE BUSINESS VALUATION INCOME APPROACH
  14. 14. SAMPLE BUSINESS VALUATION IBBOTSON BUILD-UP METHOD Source: 2013 Ibbotson® Stocks, Bonds, Bills and Inflation Valuation Yearbook, Morningstar, Inc., Chicago, Illinois.
  15. 15. SAMPLE BUSINESS VALUATION INCOME APPROACH
  16. 16. SAMPLE BUSINESS VALUATION MARKETABILITY DISCOUNT (INCOME APPROACH)
  17. 17. SAMPLE VALUATION MARKET APPROACH PRATTS STATTS® DATABASE SIC:5812/NAICS:722515
  18. 18. SAMPLE VALUATION MARKET APPROACH
  19. 19. SAMPLE VALUATION ADJUSTED NET ASSET VALUE APPROACH The appraised fair market value of the equipment was $60
  20. 20. SAMPLE BUSINESS VALUATION  Summarized results table Based upon the results of the 3 approaches to value; our opinion of value for the subject company is $1,500
  21. 21. SANITY TEST
  22. 22. SANITY TEST CONTINUATION
  23. 23. USING RULES OF THUMB
  24. 24. RULES OF THUMB  The single best source for rules of thumb for small business is the, “Business Reference Guide,” published by Business Brokerage Press  Pricing multiples: multiples of EBITDA or SDE Sellers discretionary earnings is earnings before interest, taxes, depreciation and amortization plus one owners salary or “EBITDAOC “ – Multiple of sales 
  25. 25. RULES OF THUMB  Restaurants --- Limited Service (NAICS 722211)  Rules of Thumb 30 to 40 percent of annual sales for independents; 45 to 60 percent for many franchises---plus inventory  1.5 to 2.5 SDE (Sellers Discretionary Earnings) plus inventory  Source: West, Thomas L., 2013 Business Reference Guide, “Published by Business Brokerage Press.” Page-689
  26. 26. RULES OF THUMB *Rule of Thumb #1 is in harmony with the results of the income approach and our opinion of value $1,500.
  27. 27. PART II – THE FUTURE AFFECTS VALUE TODAY
  28. 28. INDUSTRY INDICATORS  US consumer spending on services, a measure of demand for specialty eateries, rose 1.9 percent in August 2013 compared to the same month in 2012.  US personal income, which drives consumer spending at specialty eateries, rose 3.7 percent in August 2013 compared to the same month in 2012.  US retail sales for food services and drinking places, an indicator of specialty eatery sales, increased 3.8 percent in the first nine months of 2013 compared to the same period in 2012. http://subscriber.hoovers.com.proxy183.nclive.org/H/industry360/overview.html?industryId=1445
  29. 29. INDUSTRY GROWTH FORECAST First Research forecasts are based on INFORUM forecasts that are licensed from the Interindustry Economic Research Fund, Inc. (IERF) in College Park, MD. INFORUM's "interindustry-macro" approach to modeling the economy captures the links between industries and the aggregate economy. Source:http://subscriber.hoovers.com.proxy183.nclive.org/H/industry360/overview.html?industryId=1445
  30. 30. FEDERAL RESERVE BEIGE BOOK  Fifth District--Richmond Beige Book -- October 16, 2013  District economic conditions improved modestly, on balance, since our last report. Source: http://www.federalreserve.gov/monetarypolicy/beigebook/beigebook201310.htm?richmond
  31. 31. NORTH CAROLINA ECONOMIC OUTLOOK SUMMER 2013  Executive Summary: A Return to Growth, and the Old Issues  Economic improvement is expected to continue in North Carolina in the second half of 2013 and in 2014.  Nationally, 2 million payroll jobs will be added in 2013, and 2.5 million payroll jobs will be added in 2014, thereby lowering the jobless rate to 6.8% at the end of 2013 and 6.2% at the close of 2014. Source: http://ag-econ.ncsu.edu/sites/ag-econ.ncsu.edu/files/faculty/walden/nceconomicoutlooksummer2013.pdf
  32. 32. CHARLOTTE MSA ECONOMY  The Charlotte-Concord-Gastonia area economy grew by nearly five percent in real terms in 2012 making it the 29th fastest growing out of 381 metropolitan areas in the country.  This growth was broad-based and propelled by strengthening financial services and durable goods manufacturing among others. Source:http://www.nccommerce.com/LinkClick.aspx?fileticket=5USMpqUbpJU%3d&tabid=3466&mid=9134
  33. 33. THE ABC’S OF BUSINESS VALUATION SAMPLE #2  What if the business is expected to experience revenue and profit growth in subsequent years?  Sample 2 revenue & expense growth assumptions:
  34. 34. SAMPLE-2 WITH 4-5% ANNUAL GROWTH
  35. 35. SAMPLE -2 DCF WITH FORECASTED 4-5 % ANNUAL GROWTH RATE
  36. 36. PART III – “APPLES TO APPLES ” COMMON SIZE ANALYSIS
  37. 37. COMMON SIZE BALANCE SHEET *Source: https://www.profitcents.com/USEN/runreport/generatereport.aspx?GUID=40b10acb-4149-4d43-9b7ccbd4b6e1e2f2
  38. 38. COMMON SIZE INCOME STATEMENTS *Source: https://www.profitcents.com/USEN/runreport/generatereport.aspx?GUID=40b10acb-4149-4d43-9b7ccbd4b6e1e2f2
  39. 39. Checking the pulse of a business: Key Financial Ratios LIQUIDITY A measure of the company's ability to meet obligations as they come due.
  40. 40. = (Cash + Accounts Receivable) / Total Current Liabilities
  41. 41. PROFITS & PROFIT MARGIN A measure of whether the trends in profit are favorable for the company.
  42. 42. = Gross Profit / Sales
  43. 43. ASSETS A measure of how effectively the company is utilizing its gross fixed assets.
  44. 44. = Net Income / Total Equity
  45. 45. OVERVIEW OF I&N, LLC. RATIOS COMPARED TO INDUSTRY PEERS Rating Metric LIQUIDITY PROFITS & PROFIT MARGIN SALES BORROWING ASSETS Source: https://www.profitcents.com/USEN/runreport/generatereport.aspx?GUID=40b10acb-4149-4d43-9b7ccbd4b6e1e2f2
  46. 46. PART IV – “NORMALIZING” IS AN EFFORT TO ADJUST TAX OR GAAP BASIS FINANCIALS INTO ECONOMIC REALITY It is widely accepted that most financial statements often paint a picture that is different from economic reality* Highly aggressive expensing policies to reduce income taxes Excessive or insufficient compensation to owner(s) Lavish perquisites (perks) paid to the owner(s) Leases (Capital vs. Operating) Source: “Business Valuations: Fundamentals, Techniques and Theory,” 1995-2009 National Association of Certified Valuation Analysts 2009.v3, page-3-3
  47. 47. SAMPLE #3 NORMALIZING ADJUSTMENT TO OWNERS COMPENSATION
  48. 48. NORMALIZED NET CASH FLOW
  49. 49. SAMPLE #3 CAPITALIZATION OF EARNINGS METHOD W/WAGE NORMALIZING
  50. 50. CONCLUSION Fifty-one percent is usually one-hundred percent better than forty-nine percent.  Peanuts, popcorn, cotton-candy, cigarettes….discount for a lack of marketability  Render unto Caesar that which is Caesars (normalizing adjustments) 
  51. 51. OUR ENTREPRENEURS AFTER THE SALE

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