SlideShare a Scribd company logo
Business Valuation
101
Demystifying Business Valuation for
Small Business Owners
Theresa Zeidler-
Shonat
Director of Valuation
Services
1
What is Business Valuation?
2
The Short Answer
• Business valuation is a process and a
set of procedures used to estimate the
economic value of an owner's interest
in a business.
3
Poll Question
4
Let’s Start with Terminology…
• What’s the difference between
“Valuation” and “Appraisal?”
5
Definition:
Valuation
• Valuation – (noun)
the act or process of
determining the
value of a business,
business ownership
interest, security, or
intangible asset.
6
Definition:
Appraisal
• Appraisal - (noun)
the act or process of
developing an
opinion of value; an
opinion of value.
7
WHEN DO YOU NEED A VALUATION?
8
Estate and Gifting
• Death of business owner
• Transfer of business ownership to the
next generation through gift of shares
9
Divorce
• A party in the divorce holds an equity
position in a closely-held company, or
owns intellectual property that is
considered part of the divisible marital
property (“undivided one-half marital
property interest”)
10
Lending Scenarios
• Some SBA loans require a business
valuation if a specific set of conditions
exist
• Intangible assets are being used as
collateral and the lender wants an
idea of their worth
11
Business Planning
• Strategic planning - company is
considering several options and is
wanting to determine the impact
of several scenarios
• Succession planning
• Exit Planning
• Impact of expanding into new
industry or making an acquisition
12
Financial Reporting
• Company has just been acquired or
made an acquisition: purchase price
allocations (ASC 805)
– Total purchase consideration is allocated
to the acquired assets.
– Includes intangible asset valuations
13
Financial Reporting
• Company has goodwill or indefinite-
lived intangible assets on their balance
sheet from a previous acquisition -
impairment testing (ASC 350)
14
Financial Reporting
• Company holds a minority interest in
another company and is required to
mark that investment to market
15
Stock-Based Compensation
• 409A valuations.
– Private companies are required by
the IRS (Section 409A) to show that
their common stock options are
issued at fair market value, and
therefore must conduct a formal
valuation opinion at least once
every 12 months to avoid potential
tax penalties.
16
Stock-Based Compensation
• ASC 718 valuations.
– ASC 718 requires that all equity
awards granted to employees,
consultants, and board members
be accounted for at "fair value" and
then expensed over the vesting
term of the grant.
– This can become more difficult as
additional grants are made and
vesting and forfeitures add
complexity to the calculations.
17
Intangible Asset / Intellectual
Property Monetization
• Company is considering
monetizing assets - either through
use as collateral or licensing the
asset to a third party
• Company is contemplating sale
of the asset and need help
determining a price
• Company is contemplating
purchase of an asset and looking
to determine if price is fair 18
Buy-Sell Agreement
Development
• Most buy-sell agreements have a
provision for determining the price at
which an interest in the company is
sold.
– Basing this on a valuation, or requiring a
valuation in the buy-sell agreement
mitigates risk
19
Shareholder Buyouts
• Not all companies have a buy-sell
agreement in place.
• Business valuations can provide a
good point to begin negotiations, and
smooth the process.
20
21
You’ve Decided to do a Business
Valuation.
What Happens Next?
Business Valuation Timeline
22
I.
•Project Scoping and Engagement Letter
•This typically takes a few days between initial discussions and the engagement letter
II.
•Information and Data Request
•This length of this step depends on how quickly client responds with requested information
III.
•Initial Modeling and industry research
•This portion should take 4 to 6 days to complete
IV.
•Follow up questions for client
•Questions arise during step III. Timing depends on client response time.
V.
•Finish model and finalize report
•A few days to a week depending on responses received in Step IV.
VI.
•Submit final report to client
•In total process typically takes 3 to 6 weeks.
Poll Question
23
So What is “Value?”
• “Value” expresses an economic
concept. As such, it is never a fact
but always an opinion of the worth
of a property (asset)
• “Value” should always be qualified;
e.g., “fair market value,” “liquidation
value,” or “investment Value
24
Definition: Value
(USPAP, paraphrased)
• Value is the monetary
relationship between
properties (assets) and
those who buy, sell, or
use those properties
(assets)
25
The “Definitions of Value”
• Fair Market Value
• Fair Value
• Investment Value
• Intrinsic Value
• Liquidation Value
–Orderly
–Forced
26
Fair Market Value
• “The price at which the property
would change hands between a
willing buyer and a willing seller when
the former is not under any
compulsion to buy and the latter is
not under any compulsion to sell,
both parties having reasonable
knowledge of relevant facts. Court
decisions frequently state in addition
that both the hypothetical buyer and
seller are assumed to be able, as well
as willing, to trade and to be well
informed about the property and
concerning the market for such
property.” 27
Source: IRS Revenue Ruling 59-60
Fair Market Value
• "The price, expressed in terms of
cash equivalents, at which
property would change hands
between a hypothetical willing
and able buyer and a
hypothetical willing and able
seller, acting at arms length in an
open and unrestricted market,
when neither is under
compulsion to buy or sell and
when both have reasonable
knowledge of the relevant 28
Source: The International Glossary of Business Valuation
Terms
Fair Value (Financial
Reporting)
• "The price that would be received to
sell an asset or paid to transfer a
liability in an orderly transaction
between market participants at the
measurement date."
29
Source: ASC 820
Fair Value
• Can also be defined on a state-by-
state basis in divorce matters.
30
Investment Value
• "The value to a particular
investor based on
individual
requirements and
expectations."
31
Source: The International Glossary of Business Valuation
Terms
Intrinsic Value
• "The value that an investor
considers, on the basis of an
evaluation or available facts, to
be the "true" or "real" value that
will become the market value
when other investors reach the
same conclusion. When the term
applies to options, it is the
difference between the exercise
price or strike price of an option
and the market value of the
underlying security." 32
Source: The International Glossary of Business Valuation
Terms
Liquidation Value
• The most probable price that a
specified interest in real property is
likely to bring under extreme
compulsion to sell.
33
Source: Paraphrased from the Appraisal Institute, The Dictionary of Real Estate
Appraisal
34
What (Exactly) is Being Valued Here?
The Value Equation
35
+
+
+
The Business Enterprise Equation
Value of Business
Enterprise
Value of Net
Working Capital
Value of Equity
Value of Tangible
Assets
Value of Interest-
Bearing DebtValue of
Intangible Assets
BEV =
Value of
Underlying Assets
=
Value of Invested
Capital
= =
Invested Capital
• Invested capital (sometimes
called business enterprise value)
is the value of the entire business
– Think of it like the price you would
receive if you were to sell the whole
business today
• Its equal to the value of the
equity in the business plus the
value of the debt. 36
Equity
• The value of the business available to
equity holders after debt service.
• Equity can be valued as a 100%
interest, or a fractional interest.
37
Levels of Value
• Business Enterprise Value (Total
Invested Capital)
• Equity Value, 100%
• Equity Value, Non-controlling
• Equity Value, Non-marketable
• Equity Value, non-controlling, non-
marketable
• Equity Value, non-controlling, non-
marketable, non-voting 38
Intangible Assets
• Intellectual Property (IP)
• Marketing Intangibles
• Contract-Based Intangibles
• Customer-Relationship-Based
Intangibles
• Artistic Intangibles
39
40
Does WHEN a Valuation is Done
Make a Difference?
41
Point in time Measurement
• Value Changes over time
• “Valuation Date” is important
42
Some Valuations have Date
Requirements or Deadlines
• Estate tax: date of death
• Financial Reporting: fiscal year end
43
Let too
much time
elapse…
… and
gathering
information can
be like an
archaeological 44
45
How Much Valuation Do I Need?
Opinion of Value (Appraisal)
• a. An Appraisal is the act or process of determining the
value of a business, business ownership interest,
security, or intangible asset.
• b. The objective of an appraisal is to express an
unambiguous opinion as to the value of a business,
business ownership interest, security or intangible asset
which opinion is supported by all procedures that the
appraiser deems to be relevant to the valuation.
• c. An appraisal has the following qualities:
• (1) Its conclusion of value is expressed as either a
single dollar amount or a range
• (2) It considers all relevant information as of the
appraisal date available to the appraiser at the time of
performance of the valuation
• (3) The appraiser conducts appropriate procedures
to collect and analyze all information expected to be
relevant to the valuation
• (4) The valuation considers all conceptual
approaches deemed to be relevant by the appraiser
46
Calculation of Value
• Calculation engagement, as defined in the
Statement on Standards for Valuation Services
(SSVS)
• A valuation analyst performs a calculation
engagement when
– (1) the valuation analyst and the client agree on the
valuation approaches and methods the valuation
analyst will use and the extent of procedures the
valuation analyst will perform in the process of
calculating the value of a subject interest (these
procedures will be more limited than those of a
valuation engagement) and
– (2) the valuation analyst calculates the value in
compliance with the agreement. The valuation analyst
expresses the results of these procedures as a
calculated value. The calculated value is expressed as
a range or as a single amount.
• A calculation engagement does not include all of
the procedures required for a valuation
engagement and were a valuation engagement to
be performed, the results may be different. 47
48
Attributes Opinion of Value
Calculation of
Value
Acceptance
Accepted by Courts X
Accepted by IRS X
Basis for Expert Testimony X
Analysis Includes
Income Approacjh X Sometimes
Market Approach X Sometimes
Cost Approach X Sometimes
Economic and Market Conditions X
Past Sales of Interest in Business X
Financial Benchmarks X
Market Research X
Industry Research X
Macro Risk Assessment X
Company-Specific Risk Assessment X
Minority and Marketability Discounts when appropriate
to subject interest
when appropriate to
subject interest
Calculation of Value vs. Opinion of Value
49
How Is Value
Determined?
Three Approaches to Value
50
Market
Approach
Asset
Approach
Income
Approach
Value Conclusion
Market Approach
51
Market Approach Theory
• The value of the company (or asset)
reflects the price at which
comparable companies (or assets) are
purchased under similar circumstance.
• Requires that comparable transactions
be available.
52
Market Approach - Methods
• Guideline publicly-traded
company method
– Based on similar and relevant
comparable entities
– Adjustments are often necessary to
make the comparables more similar
• Comparative transaction method
– Based on actual transactions of
similar entities
53
Public Company Method
• Valuation relies on information
from comparable publicly
traded companies
• Should have several
“comparables”
• Adjustments may be necessary
to make them more
comparable or to normalize the
comps
• Sometimes it just doesn’t make
sense to use public companies
54
Comparative Transaction
Methods
• Transaction
database
multiples
• Prior “arm’s-
length”
transactions
• Rules of thumb
55
Comparability?
• Public companies tend to be much
larger, have greater resources and
access to capital
– Public company multiples often need to
be adjusted
• Private companies – usually don’t
know terms of transaction, which can
impact price
56
Asset Approach
57
Asset Approach Theory
• The value of the company is estimated
as a function of the current cost to
purchase or replace all assets held
within the operating entity.
• It is based upon the principal of
substitution, which states that no
prudent investor would pay more for a
company (or asset) than the amount
to re-create or buy it.
58
Asset Approach
• Useful for:
–Asset-intensive businesses
–Real estate holding
companies
–Entities that hold mostly
securities (or cash)
–Some contracting businesses
that bid for work
59
Asset Approach
• Often requires outside appraisals
• Must identify non-operating
assets like excess cash or
obsolete inventory
• Company may have intangible
assets that contribute to business
value that aren’t listed on the
books
60
Income Approach
61
Income Approach Theory
• Predicated upon the value of the
future cash flows that an asset
will generate over its remaining
useful life.
• It involves the projection of the
cash flows the company (or
asset) is expected to generate.
• These cash flows are then
converted into a present value
equivalent through discounting.
62
Income Approach - Methods
• Discounted cash flow method
• Capitalization of earnings method
• Other methods exist, but are less
commonly used
63
Discounted Cash Flow
Method
• Converts a stream of projected
earnings or other benefit stream into
present value by applying a discount
rate
• The earnings from each period are
discounted to present value and then
a “terminal” value is added to arrive at
the total value
64
65
FCFFn (1 + g) (1 + WACC)0.5
PV = FCFF1 + FCFF2 + … + FCFFn + WACC - g
(1 + WACC)0.5
(1 + WACC)1.5
( 1+ WACC)n - 0.5
(1+WACC)n
Where:
PV = Present Value
FCFF = Free Cash Flow to the Firm
n = Number of Periods in Discrete Projection Period
g = Long-Term Sustainable Growth Rate in FCF
WACC= Weighted Average Cost of Capital
Discounting Formula
Present Value
66
Value today Years of saving
$1.00 1 year
$1.00 2 years
$1.00 3 years
Amount received Years till cash flow
$1.10 1 year
$1.21 2 years
$1.33 3 years
$1.00
$1.00
What will savings be worth?
Examples of Present Value
$1.21
$1.33
$1.10
Saving Today at 10%
Discounting Future Cash Flows at 10%
What is this cash flow worth today?
$1.00
Projected Earnings
• Predict future performance
based on analysis of historical
performance and current and
expected operating and industry
conditions
– Various tools are available to assist
the valuator in predicting future
performance
– Common sense and informed
judgment must be the deciding
factors
67
What Is the Discount Rate?
• The rate of return, or cost of capital,
necessary to convert a monetary sum,
payable or receivable in the future,
into present value
68
How Do We Develop a
Discount Rate?
• Weighted Average Cost of Capital
(WACC)
– Capital Asset Pricing Model (CAPM)
• Published industry standards
69
Weighted Average Cost of
Capital
70
WACC = (Ke x We) + (Kd x Wd)
Where: Ke = Cost of Equity
Kd = Cost of Debt
We = Weight of Equity
Wd = Weight of Debt
WACC Formula
Cost of Equity
71
Cost of Equity = Rf + β(RPm) + RPs + RPu
Where: Rf =
β =
RPm =
RPs =
RPu =
(1)
Modified Capital Asset Pricing Model
Risk premium for specific company
("unsystematic risk)
Risk premium for small size
Cost of Equity Formula (1)
Rate of Return for a risk-free security as of the
valuation date
Subject company's beta coefficient
Equity risk premium for the market
Cost of Equity
72
Cost of Equity = RPm + Rf + RPs + IP + RPu
Where: RPm =
Rf =
RPs =
IP =
RPu =
(1)
Modified Capital Asset Pricing Model - Build-Up Method
Risk premium for specific company ("unsystematic risk")
Cost of Equity Formula (1)
Equity risk premium for the market
Rate of Return for a risk-free security as of the valuation
date
Risk premium for small size
Industry Risk Premium
Example of a Build-Up Method
to Developing the WACC
Risk-Free Rate (20-year Treasury-Bill) 2.5%
Equity Risk Premium 7.0%
Size Premium 3.5%
Company and Industry Specific Risk Premium 5.0%
Total Equity Discount Rate 18.0%
Less: Long-Term Growth 5.0%
Equity Capitalization Rate 13.0%
73
Capitalization of Earnings
Method
• Like other income approach
methods, this is based on the
principle that the value of the
business can be estimated by the
future benefits received from
ownership of the business.
• Future benefits of ownership are
assumed to be reliably predicted
by past performance,
• Only appropriate for companies in
stable growth phases
74
Capitalization of Earnings
Method
75
PV = NCF1
k-g
Where:
PV =
NCF1 =
k =
g =
Present value
Net Cash Flow expected in period 1, the period immediately
following the valuation date
Weighted Average Cost of Capital
Expected long-term growth rate in net cash flow
Capitalization of Earnings Formula
Discounted Earnings Method vs.
Capitalization Method
• DCF is applied when
– Future performance is not expected to be
consistent and/or stable
• Capitalization is applied when
– Company performance is expected to be
stable or grow at a stable rate
76
77
What Impacts Value?
78
Factors that
Affect Business
Value
External
Business owner
can't really
change these
Internal
Business owner
can change these
and impact
business value
External Factors That Impact
Company Value
Increase Value
• Expanding markets
• A dominant market
position
• Barriers to entry
• Expanding industry
• Expanding economy
• Shift in consumer
preference to
company product
Decrease Value
• Shrinking market
• Challenged market
share
• Lack of barriers to entry
• Contracting industry
• Contracting Economy
• Shift in consumer
preference away from
company product
79
Market Timing
80
SIC Code Industry Pre-Recession(1)
Recession (2)
Post-Recession (3)
5812 Eating Places 0.49 0.38 0.35
7231 Beauty Shops 0.49 0.40 0.36
7349 Building Cleaning and Maintenance Services 0.68 0.65 0.65
7389 Business Services, Not Elsewhere Classified 1.01 0.99 0.93
7538 General Automotive Repair 0.48 0.42 0.39
7991 Physical Fitness Facilities 0.66 0.76 0.64
8299 Schools and Education Services, NEC 1.07 0.66 0.94
Notes: (1) Pre-recession is defined as 1/1/03 through 11/31/07
(2) Recession is defined as 12/1/07 through 8/31/09
(3) Post-recession is defined as 9/1/09 through 12/1/14
Transactions Multiples Throughout the Business Cycle
MVIC to Sales
Internal Factors That Impact
Company Value
Increase Value
• Organized up-to-date
financials
• Strong gross margins
• Projections of strong
cash flow
• Sufficient working
capital to support
operations
• Systems and structures
• Cross trained
employee base
Decrease Value
• Declining Sales
• Inconsistent yearly
financial performance
• Unreported cash, or
off-balance sheet loans
• Lack of key employees
• No formalized business
and marketing plan
81
DISCOUNTS FOR LACK OF CONTROL
AND MARKETABILITY
82
Levels of Value
83
Investment or Synergistic Value
Control Value (Freely-Traded)
Minority Value (Freely-Traded)
Non-Marketable, Minority
Interest Value
$14
$12
$10
$7
Marketable, control value
Marketable, control value
Marketable, non-control value
Non-marketable, non-control
value
Discounts & Premiums
• Discount for lack of control
• Premium for control
• Discount for lack of marketability
• Key person discount
• Depend on the interest to be valued
and the techniques used to establish
the value conclusion
84
Value of Control
• Control attributes
– Hire and fire
– Distribute earnings/declare dividends
– Buy and sell assets
– Enter into contracts
– Liquidate the business
– Set strategic objectives and goals
– Set compensation and performance
standards
85
Lack of Control
• Lack of control in a closely held
company implies you are at the mercy
of the controlling owner(s)
• Substantial discounts may be
necessary to attract an investor to
purchase a minority interest in a closely
held company
86
Determination of
Discount/Premium
• Control premium studies
• Mergerstat Control Premium Studies
– Measures how much over the market price
is paid to gain control of a company
– Looks at the price of the stock before and
after the announcement of an acquisition or
merger
87
Marketability
• Ability to convert ownership interest to cash
• Time required to do so affects the level of
marketability
• Other factors that affect marketability
– Distributions of earnings
– Active market or industry roll-up
– Key person
– Number and profile of owners
– Restrictions on transfer of stock
88
Discount for Lack of
Marketability
• From Pre-IPO studies
– Comparing the price of a company’s
stock before and after the
announcement of “going public”
• From Restricted Stock Studies
– Compare Letter Stock restricted from
trading for a certain time period to its
publicly traded counterpart
89
90
Marketable, control value 5,000,000$
Discount for lack of control 20% 1,000,000$
Marketable, minority value 4,000,000$
Discount for lack of marketability 30% 1,200,000$
Non-Marketable, minority value 2,800,000$
Example of Lack of Control and Lack of Marketablility Discounts
WHAT ARE THE ADJUSTMENTS TO MY FINANCIAL
DATA AND WHY HAVE YOU DONE THEM?
91
Adjustments to Financial
Statements
• One objective of
financial statement
analysis is to
provide a financial
picture that can be
reliably used to
estimate future
performance.
92
Adjustments to Financial
Statements
• Historical financial statements may
need to be adjusted for certain items
that distort the picture of the true
operating performance of the
business.
93
Reasons for Financial
Adjustments
• To develop a starting point
from which to predict future
earnings
• To present historical financial
information on a normalized
basis
• To adjust for accounting
practices that are a departure
from industry or GAAP
standards 94
Reasons for Financial
Adjustments
• To facilitate comparison of a given
company to itself, to other companies
within the same industry, or to an
accepted industry standard.
• To compare the debt and/or capital
structure of the company to that of its
competition or peers
• To compare compensation with
industry norms
95
What is Adjusted?
• Unusual items
• Nonrecurring items
• Extraordinary items (both unusual and
nonrecurring)
• Non-operating items
• Items affected by changes in
accounting principle
• Items that are not in conformance
with GAAP
• Degree of ownership interest,
including whether interest has control
96
Unusual Items
• Events or transactions that posses a
high degree of abnormality
• Unrelated to, or only incidentally
related to, the ordinary and typical
activities of the entity
97
Nonrecurring Items
• Events or transactions that are not
reasonably expected to recur in the
foreseeable future
98
Extraordinary items
• Events or transactions that are
distinguished by their unusual nature
and infrequency of occurrence
• Item must be both unusual and
nonrecurring to be classified as
extraordinary
99
Extraordinary items
• Events or transactions that are
distinguished by their unusual nature
and infrequency of occurrence
• Item must be both unusual and
nonrecurring to be classified as
extraordinary
100
Unusual, Nonrecurring, and
Extraordinary items
• Strikes and other types of work
stoppages
• Litigation expense or recoveries
101
Unusual, Nonrecurring, and
Extraordinary items
• Uninsured losses due to unforeseen
disasters like fire or flood
• One-time realization of revenues or
expenses due to nonrecurring
contracts
• Gain or loss on the sales of a business
unit or business assets
102
Unusual, Nonrecurring, and
Extraordinary items
• Discontinuation of operations
• Insurance proceeds received on the
life of a key person or from property or
casualty claim
103
Non-Operating Items
• Excess cash
• Marketable securities (in excess of
reasonable needs of the business)
• Real estate (if not used in business
operations)
• Private planes, entertainment, or sports
facilities
• Antiques, private collections, etc.
104
105
Changes in Accounting Principal
• A change in the method of pricing
inventory (e.g., LIFO to FIFO)
• A change in the method of depreciating
previously-recorded assets (e.g., straight-
line to MACRS)
Changes in Accounting Principal
• A change in the method of accounting for
long-term construction-type contracts
• A change to or from the full-cost method
of accounting in extractive industries
106
Nonconformance with
GAAP
• Financial statements prepared on
a tax or cash accounting basis
• Unrecorded revenue in cash
business
• Inadequate bad debt reserve
107
Nonconformance with
GAAP
• Understated amounts of
inventory, failure to write off
obsolete or slow moving
inventory, etc.
• Unrecorded liabilities such as
capital lease obligations,
workforce-related costs (wages,
sick/vacation pay), deferred
income taxes
• Capitalization/expense policies
for fixed assets and prepaid
expenses
108
What Are Adjustments Based
On?
• Industry ratios
• Market wage data
• Company historical data
109
GOODWILL?
110
What is Goodwill?
Two commonly used definitions of
goodwill
- The bundle of all intangible assets of a
company
- The residual intangible value remaining
after all identifiable intangible assets have
been valued.
111
What Is Goodwill?
• Entity goodwill is the
goodwill that attaches to
the business enterprise.
112
What Is Goodwill?
• Personal Goodwill is the
goodwill that attaches to
the persona and
personal efforts of the
individual.
– Generally considered to
be difficult to transfer, if it
is transferable at all
113
When Does Goodwill Matter?
• Divorce Valuations
• Financial Reporting
114
Where Does Personal
Goodwill Arise?
• Traditionally, the issue of personal
goodwill arose almost exclusively in
the context of a professional practice
owner.
• The line gets “fuzzy” in the
commercial business arena
• Personal goodwill in a commercial
business might be more “key person
risk” than actual personal goodwill
• Look for special relationships with
customers or suppliers 115
Separating Personal from
Entity
• No generally accepted methodologies to
divide goodwill into personal and entity
components
– Methods to calculate personal goodwill can
depend on case or jurisdiction
– Multi-Attribute Utility Model
– With and Without Analysis
– Excess Earnings
116
Factors the Impact Personal
Goodwill
• Age and health of professional
• Earning power
• Reputation
• Comparative success
• Practice duration
• Marketability
• Types of Clients and Services
117
Factors that Impact Personal
Goodwill
• Location and Demographics
• Fees
• Source of New Clients
• Production
• Workforce
• Competition
• Non-Compete Agreements
118
DIVORCE-SPECIFIC VALUATION
CHALLENGES
119
Valuation isn’t Taught in Law
School
• Judges don’t necessarily understand
valuation theory
– Contradictory Case Law proves this out
– Valuation report needs to make valuation theory
and the intuition behind it crystal clear
120
Short Window in
which to Obtain
Info• Need to
anticipate all
future info
needs as part
of discovery
process
121
Short Window in which to Obtain
Info• Valuation Process Often Goes Like This:
1. Request info
2. Go through info and determine if additional info is
required
3. Request follow on info
4. Repeat step two/three as needed
5. Valuation and report writing
6. Last round of questions to cover issues that came up in
the valuation process/dot the i’s and cross the t’s.
7. Finalize and issue report
• Steps 3, 4, and 6 can be challenging
122
Short Window in which to Obtain
Info• If you miss key info, you are out of luck
123
Problematic Information Flow
• Spouse may be unwilling to
share info, or actively
attempting misdirection
124
Incentive to Hide Value
• Perceived advantage to
making business look less
valuable
• Postpone signing contracts
that guarantee business
income
• Defer follow-on rounds of
financing
• “Business Shift” Syndrome
125
“BS”
• A sudden shift in
business performance
around the time of the
divorce filing.
• Business owner trying
to make business
appear less valuable.
• Could also be the result
of macroeconomic or
industry conditions.
Careful assessment is
necessary 126
In summary…
• Valuation is a process that leads to
an opinion of value.
• There are many scenarios in which
a valuation is needed or helpful.
• There are three approaches to
value, but many valuation
methods.
• You can value invested capital,
equity, or individual assets.
• Certain situations have special
considerations to be aware of.
127
Questions?
128
129
Theresa Zeidler-Shonat
Director of Valuation Services
Smith & Gesteland, LLP
608.828.3154
theresa.zeidler-shonat@sgcpa.com
130

More Related Content

What's hot

DCF Valuation : Business Valuation Article by Corporate Valuation Team
DCF Valuation : Business Valuation Article by Corporate Valuation TeamDCF Valuation : Business Valuation Article by Corporate Valuation Team
DCF Valuation : Business Valuation Article by Corporate Valuation Team
Corporate Professionals
 
Basic Company Valuation
Basic Company ValuationBasic Company Valuation
Basic Company Valuation
Faizanization
 
Valuation methodology
Valuation methodologyValuation methodology
Valuation methodology
Rod Medallon
 
Valuation and Financial Reorganisation
Valuation  and Financial ReorganisationValuation  and Financial Reorganisation
Valuation
ValuationValuation
Valuation
Anjana Vivek
 
Business valuation process
Business valuation processBusiness valuation process
Business valuation process
Dominic Brault
 
The Valuation Process - Value Management Inc
The Valuation Process - Value Management IncThe Valuation Process - Value Management Inc
The Valuation Process - Value Management Inc
Value Management, Inc.
 
Valuation of business
Valuation of businessValuation of business
Valuation of business
internalaudit_123
 
Valncaps2
Valncaps2Valncaps2
Valncaps2
ronald johnson
 
Corporate Valuations: Techniques and Application
Corporate Valuations: Techniques and ApplicationCorporate Valuations: Techniques and Application
Corporate Valuations: Techniques and Application
Corporate Professionals
 
Registered Valuer in Companies Act 2013
Registered Valuer in Companies Act 2013Registered Valuer in Companies Act 2013
Registered Valuer in Companies Act 2013
Corporate Professionals
 
Business Valuation, Acquistion and Divestitures
Business Valuation, Acquistion and DivestituresBusiness Valuation, Acquistion and Divestitures
Business Valuation, Acquistion and Divestitures
Veracap M&A International
 
Valuation (REAL ESTATE) B.ARCHITECTURE
Valuation (REAL ESTATE) B.ARCHITECTUREValuation (REAL ESTATE) B.ARCHITECTURE
Valuation (REAL ESTATE) B.ARCHITECTURE
KIRAN DAS VAISHNAV
 
01 imcost class presentation valuation of business
01 imcost class presentation   valuation of business01 imcost class presentation   valuation of business
01 imcost class presentation valuation of business
CA Mandar Joshi
 
Business Valuation in India & Emerging Opportunities
Business Valuation in India & Emerging OpportunitiesBusiness Valuation in India & Emerging Opportunities
Business Valuation in India & Emerging Opportunities
Corporate Professionals
 
Valuation presentation
Valuation presentationValuation presentation
Valuation presentation
Mikie Archibald
 
Business valuation fundamentals & the maximization of entity value
Business valuation fundamentals & the maximization of entity valueBusiness valuation fundamentals & the maximization of entity value
Business valuation fundamentals & the maximization of entity value
Azran Financial APC
 
Valuation for startups
Valuation for startupsValuation for startups
Valuation for startups
Anjana Vivek
 
Introduction to valuation and DCF
Introduction to valuation and DCFIntroduction to valuation and DCF
Introduction to valuation and DCF
Aditya Komaragiri
 
Valuation Basics
Valuation BasicsValuation Basics
Valuation Basics
Anjana Vivek
 

What's hot (20)

DCF Valuation : Business Valuation Article by Corporate Valuation Team
DCF Valuation : Business Valuation Article by Corporate Valuation TeamDCF Valuation : Business Valuation Article by Corporate Valuation Team
DCF Valuation : Business Valuation Article by Corporate Valuation Team
 
Basic Company Valuation
Basic Company ValuationBasic Company Valuation
Basic Company Valuation
 
Valuation methodology
Valuation methodologyValuation methodology
Valuation methodology
 
Valuation and Financial Reorganisation
Valuation  and Financial ReorganisationValuation  and Financial Reorganisation
Valuation and Financial Reorganisation
 
Valuation
ValuationValuation
Valuation
 
Business valuation process
Business valuation processBusiness valuation process
Business valuation process
 
The Valuation Process - Value Management Inc
The Valuation Process - Value Management IncThe Valuation Process - Value Management Inc
The Valuation Process - Value Management Inc
 
Valuation of business
Valuation of businessValuation of business
Valuation of business
 
Valncaps2
Valncaps2Valncaps2
Valncaps2
 
Corporate Valuations: Techniques and Application
Corporate Valuations: Techniques and ApplicationCorporate Valuations: Techniques and Application
Corporate Valuations: Techniques and Application
 
Registered Valuer in Companies Act 2013
Registered Valuer in Companies Act 2013Registered Valuer in Companies Act 2013
Registered Valuer in Companies Act 2013
 
Business Valuation, Acquistion and Divestitures
Business Valuation, Acquistion and DivestituresBusiness Valuation, Acquistion and Divestitures
Business Valuation, Acquistion and Divestitures
 
Valuation (REAL ESTATE) B.ARCHITECTURE
Valuation (REAL ESTATE) B.ARCHITECTUREValuation (REAL ESTATE) B.ARCHITECTURE
Valuation (REAL ESTATE) B.ARCHITECTURE
 
01 imcost class presentation valuation of business
01 imcost class presentation   valuation of business01 imcost class presentation   valuation of business
01 imcost class presentation valuation of business
 
Business Valuation in India & Emerging Opportunities
Business Valuation in India & Emerging OpportunitiesBusiness Valuation in India & Emerging Opportunities
Business Valuation in India & Emerging Opportunities
 
Valuation presentation
Valuation presentationValuation presentation
Valuation presentation
 
Business valuation fundamentals & the maximization of entity value
Business valuation fundamentals & the maximization of entity valueBusiness valuation fundamentals & the maximization of entity value
Business valuation fundamentals & the maximization of entity value
 
Valuation for startups
Valuation for startupsValuation for startups
Valuation for startups
 
Introduction to valuation and DCF
Introduction to valuation and DCFIntroduction to valuation and DCF
Introduction to valuation and DCF
 
Valuation Basics
Valuation BasicsValuation Basics
Valuation Basics
 

Viewers also liked

Corporate valuation
Corporate valuationCorporate valuation
Corporate valuation
savi_raina
 
Valuation
ValuationValuation
Valuation
suvarnajoshia
 
Valuation
ValuationValuation
Valuation
srinivas2036
 
Valuation Methods
Valuation MethodsValuation Methods
Valuation Methods
FITT
 
Valncaps2
Valncaps2Valncaps2
Valncaps2
Nitesh Nair
 
Current Topics in Valuation
Current Topics in ValuationCurrent Topics in Valuation
Current Topics in Valuation
John Glenn
 
Business valuation throughout a business's life cycle, march 11, 2010 (1)
Business valuation throughout a business's life cycle, march 11, 2010 (1)Business valuation throughout a business's life cycle, march 11, 2010 (1)
Business valuation throughout a business's life cycle, march 11, 2010 (1)
ChrisBest
 
Funding 101 w/ Jenny Lefcourt
Funding 101 w/ Jenny LefcourtFunding 101 w/ Jenny Lefcourt
Funding 101 w/ Jenny Lefcourt
Stanford Venture Studio
 
409A Valuations: A Primer
409A Valuations: A Primer409A Valuations: A Primer
409A Valuations: A Primer
carbonadmin
 
Know your valuation for equity compensation and avoid the perils of 409a
Know your valuation for equity compensation and avoid the perils of 409aKnow your valuation for equity compensation and avoid the perils of 409a
Know your valuation for equity compensation and avoid the perils of 409a
The Capital Network
 
Sponsor lunch presentation december 2016
Sponsor lunch presentation december 2016Sponsor lunch presentation december 2016
Sponsor lunch presentation december 2016
The Capital Network
 
The ABC's of Business Valuation
The ABC's of Business Valuation The ABC's of Business Valuation
The ABC's of Business Valuation
TurnerBusiness
 
Know Your Valuation for Equity Compensation (And Avoid the Perils of 409A) - ...
Know Your Valuation for Equity Compensation (And Avoid the Perils of 409A) - ...Know Your Valuation for Equity Compensation (And Avoid the Perils of 409A) - ...
Know Your Valuation for Equity Compensation (And Avoid the Perils of 409A) - ...
The Capital Network
 
Business valuation imec7 22-14-final
Business valuation imec7 22-14-finalBusiness valuation imec7 22-14-final
Business valuation imec7 22-14-final
Glen Birnbaum
 
FASB 2014 An Appraiser's Guide To Purchase Price Allocation -Final
FASB 2014 An Appraiser's Guide To Purchase Price Allocation -FinalFASB 2014 An Appraiser's Guide To Purchase Price Allocation -Final
FASB 2014 An Appraiser's Guide To Purchase Price Allocation -Final
Justin Glasser, ASA, MAI, MRICS
 
Company Valuation
Company ValuationCompany Valuation
Company Valuation
ankitgor
 
Valuation
ValuationValuation
NETFLIX Business Analysis & Valuation
NETFLIX Business Analysis & ValuationNETFLIX Business Analysis & Valuation
NETFLIX Business Analysis & Valuation
Alegra N Horne
 
Business Valuation Short Presentation
Business Valuation  Short PresentationBusiness Valuation  Short Presentation
Business Valuation Short Presentation
Matthew Waymire
 

Viewers also liked (19)

Corporate valuation
Corporate valuationCorporate valuation
Corporate valuation
 
Valuation
ValuationValuation
Valuation
 
Valuation
ValuationValuation
Valuation
 
Valuation Methods
Valuation MethodsValuation Methods
Valuation Methods
 
Valncaps2
Valncaps2Valncaps2
Valncaps2
 
Current Topics in Valuation
Current Topics in ValuationCurrent Topics in Valuation
Current Topics in Valuation
 
Business valuation throughout a business's life cycle, march 11, 2010 (1)
Business valuation throughout a business's life cycle, march 11, 2010 (1)Business valuation throughout a business's life cycle, march 11, 2010 (1)
Business valuation throughout a business's life cycle, march 11, 2010 (1)
 
Funding 101 w/ Jenny Lefcourt
Funding 101 w/ Jenny LefcourtFunding 101 w/ Jenny Lefcourt
Funding 101 w/ Jenny Lefcourt
 
409A Valuations: A Primer
409A Valuations: A Primer409A Valuations: A Primer
409A Valuations: A Primer
 
Know your valuation for equity compensation and avoid the perils of 409a
Know your valuation for equity compensation and avoid the perils of 409aKnow your valuation for equity compensation and avoid the perils of 409a
Know your valuation for equity compensation and avoid the perils of 409a
 
Sponsor lunch presentation december 2016
Sponsor lunch presentation december 2016Sponsor lunch presentation december 2016
Sponsor lunch presentation december 2016
 
The ABC's of Business Valuation
The ABC's of Business Valuation The ABC's of Business Valuation
The ABC's of Business Valuation
 
Know Your Valuation for Equity Compensation (And Avoid the Perils of 409A) - ...
Know Your Valuation for Equity Compensation (And Avoid the Perils of 409A) - ...Know Your Valuation for Equity Compensation (And Avoid the Perils of 409A) - ...
Know Your Valuation for Equity Compensation (And Avoid the Perils of 409A) - ...
 
Business valuation imec7 22-14-final
Business valuation imec7 22-14-finalBusiness valuation imec7 22-14-final
Business valuation imec7 22-14-final
 
FASB 2014 An Appraiser's Guide To Purchase Price Allocation -Final
FASB 2014 An Appraiser's Guide To Purchase Price Allocation -FinalFASB 2014 An Appraiser's Guide To Purchase Price Allocation -Final
FASB 2014 An Appraiser's Guide To Purchase Price Allocation -Final
 
Company Valuation
Company ValuationCompany Valuation
Company Valuation
 
Valuation
ValuationValuation
Valuation
 
NETFLIX Business Analysis & Valuation
NETFLIX Business Analysis & ValuationNETFLIX Business Analysis & Valuation
NETFLIX Business Analysis & Valuation
 
Business Valuation Short Presentation
Business Valuation  Short PresentationBusiness Valuation  Short Presentation
Business Valuation Short Presentation
 

Similar to Business Valuation 101: Demystifying Business Valuation for Small Business Owners

What's it Worth? Valuing a Business for Sale
What's it Worth? Valuing a Business for SaleWhat's it Worth? Valuing a Business for Sale
What's it Worth? Valuing a Business for Sale
Financial Poise
 
Marek Panfil Chartered Business Valuator
Marek Panfil Chartered Business ValuatorMarek Panfil Chartered Business Valuator
Marek Panfil Chartered Business Valuator
Kozminski University
 
Valuation base
Valuation baseValuation base
Valuation Issues in Developing and Executing Buy-Sell Agreements
Valuation Issues in Developing and Executing Buy-Sell AgreementsValuation Issues in Developing and Executing Buy-Sell Agreements
Valuation Issues in Developing and Executing Buy-Sell Agreements
Skoda Minotti
 
VALUATION 2022: Minority and Illiquidity Discounts
VALUATION 2022: Minority and Illiquidity DiscountsVALUATION 2022: Minority and Illiquidity Discounts
VALUATION 2022: Minority and Illiquidity Discounts
Financial Poise
 
Mba fm 02 - security analysis and portfolio---introduction
Mba fm 02 - security analysis and portfolio---introductionMba fm 02 - security analysis and portfolio---introduction
Mba fm 02 - security analysis and portfolio---introduction
Aniruddha Ghosh
 
Complex Legal and Financial Challenges (and Opportunities) to Business Succes...
Complex Legal and Financial Challenges (and Opportunities) to Business Succes...Complex Legal and Financial Challenges (and Opportunities) to Business Succes...
Complex Legal and Financial Challenges (and Opportunities) to Business Succes...
Smith Family Business Initiative at Cornell
 
Management of risk in financial services
Management of risk in financial servicesManagement of risk in financial services
Management of risk in financial services
DheerajSharma322
 
Principles of Valuation
Principles of ValuationPrinciples of Valuation
Principles of Valuation
GeetShah8
 
Process of SECURITISATION & Credit Rating.pdf
Process of SECURITISATION & Credit Rating.pdfProcess of SECURITISATION & Credit Rating.pdf
Process of SECURITISATION & Credit Rating.pdf
VivekSharma712728
 
Valuation overview
Valuation overviewValuation overview
Valuation overview
Abraham Mathews
 
Skoda Minotti Medical Practice Valuation Presentation
Skoda Minotti Medical Practice Valuation PresentationSkoda Minotti Medical Practice Valuation Presentation
Skoda Minotti Medical Practice Valuation Presentation
Skoda Minotti
 
Corporate valuation overview
Corporate valuation overviewCorporate valuation overview
Corporate valuation overview
RudreshSamant
 
value-1.ppt
value-1.pptvalue-1.ppt
value-1.ppt
Ruhee Mittal
 
400
400400
Basic valuation concept final
Basic valuation concept finalBasic valuation concept final
Basic valuation concept final
Prashant Mahamulkar
 
PPT_ON_VALUATION Business Valuation Final
PPT_ON_VALUATION Business Valuation FinalPPT_ON_VALUATION Business Valuation Final
PPT_ON_VALUATION Business Valuation Final
jainishbhagat1
 
Valuing Lost Profits for Litigation Purposes (Series: Valuation)
Valuing Lost Profits for Litigation Purposes (Series: Valuation)Valuing Lost Profits for Litigation Purposes (Series: Valuation)
Valuing Lost Profits for Litigation Purposes (Series: Valuation)
Financial Poise
 
Investing in Commercial Property (Series: Real Estate Investing 101 - 2020)
Investing in Commercial Property (Series: Real Estate Investing 101 - 2020) Investing in Commercial Property (Series: Real Estate Investing 101 - 2020)
Investing in Commercial Property (Series: Real Estate Investing 101 - 2020)
Financial Poise
 
CVR Module 1.pptx
CVR Module 1.pptxCVR Module 1.pptx
CVR Module 1.pptx
SivaSankari16937
 

Similar to Business Valuation 101: Demystifying Business Valuation for Small Business Owners (20)

What's it Worth? Valuing a Business for Sale
What's it Worth? Valuing a Business for SaleWhat's it Worth? Valuing a Business for Sale
What's it Worth? Valuing a Business for Sale
 
Marek Panfil Chartered Business Valuator
Marek Panfil Chartered Business ValuatorMarek Panfil Chartered Business Valuator
Marek Panfil Chartered Business Valuator
 
Valuation base
Valuation baseValuation base
Valuation base
 
Valuation Issues in Developing and Executing Buy-Sell Agreements
Valuation Issues in Developing and Executing Buy-Sell AgreementsValuation Issues in Developing and Executing Buy-Sell Agreements
Valuation Issues in Developing and Executing Buy-Sell Agreements
 
VALUATION 2022: Minority and Illiquidity Discounts
VALUATION 2022: Minority and Illiquidity DiscountsVALUATION 2022: Minority and Illiquidity Discounts
VALUATION 2022: Minority and Illiquidity Discounts
 
Mba fm 02 - security analysis and portfolio---introduction
Mba fm 02 - security analysis and portfolio---introductionMba fm 02 - security analysis and portfolio---introduction
Mba fm 02 - security analysis and portfolio---introduction
 
Complex Legal and Financial Challenges (and Opportunities) to Business Succes...
Complex Legal and Financial Challenges (and Opportunities) to Business Succes...Complex Legal and Financial Challenges (and Opportunities) to Business Succes...
Complex Legal and Financial Challenges (and Opportunities) to Business Succes...
 
Management of risk in financial services
Management of risk in financial servicesManagement of risk in financial services
Management of risk in financial services
 
Principles of Valuation
Principles of ValuationPrinciples of Valuation
Principles of Valuation
 
Process of SECURITISATION & Credit Rating.pdf
Process of SECURITISATION & Credit Rating.pdfProcess of SECURITISATION & Credit Rating.pdf
Process of SECURITISATION & Credit Rating.pdf
 
Valuation overview
Valuation overviewValuation overview
Valuation overview
 
Skoda Minotti Medical Practice Valuation Presentation
Skoda Minotti Medical Practice Valuation PresentationSkoda Minotti Medical Practice Valuation Presentation
Skoda Minotti Medical Practice Valuation Presentation
 
Corporate valuation overview
Corporate valuation overviewCorporate valuation overview
Corporate valuation overview
 
value-1.ppt
value-1.pptvalue-1.ppt
value-1.ppt
 
400
400400
400
 
Basic valuation concept final
Basic valuation concept finalBasic valuation concept final
Basic valuation concept final
 
PPT_ON_VALUATION Business Valuation Final
PPT_ON_VALUATION Business Valuation FinalPPT_ON_VALUATION Business Valuation Final
PPT_ON_VALUATION Business Valuation Final
 
Valuing Lost Profits for Litigation Purposes (Series: Valuation)
Valuing Lost Profits for Litigation Purposes (Series: Valuation)Valuing Lost Profits for Litigation Purposes (Series: Valuation)
Valuing Lost Profits for Litigation Purposes (Series: Valuation)
 
Investing in Commercial Property (Series: Real Estate Investing 101 - 2020)
Investing in Commercial Property (Series: Real Estate Investing 101 - 2020) Investing in Commercial Property (Series: Real Estate Investing 101 - 2020)
Investing in Commercial Property (Series: Real Estate Investing 101 - 2020)
 
CVR Module 1.pptx
CVR Module 1.pptxCVR Module 1.pptx
CVR Module 1.pptx
 

Recently uploaded

Satta Matka Dpboss Kalyan Matka Results Kalyan Chart
Satta Matka Dpboss Kalyan Matka Results Kalyan ChartSatta Matka Dpboss Kalyan Matka Results Kalyan Chart
Satta Matka Dpboss Kalyan Matka Results Kalyan Chart
Satta Matka Dpboss Kalyan Matka Results
 
Efficient PHP Development Solutions for Dynamic Web Applications
Efficient PHP Development Solutions for Dynamic Web ApplicationsEfficient PHP Development Solutions for Dynamic Web Applications
Efficient PHP Development Solutions for Dynamic Web Applications
Harwinder Singh
 
Satta Matka Dpboss Kalyan Matka Results Kalyan Chart
Satta Matka Dpboss Kalyan Matka Results Kalyan ChartSatta Matka Dpboss Kalyan Matka Results Kalyan Chart
Satta Matka Dpboss Kalyan Matka Results Kalyan Chart
Satta Matka Dpboss Kalyan Matka Results
 
2024.06 CPMN Cambridge - Beyond Now-Next-Later.pdf
2024.06 CPMN Cambridge - Beyond Now-Next-Later.pdf2024.06 CPMN Cambridge - Beyond Now-Next-Later.pdf
2024.06 CPMN Cambridge - Beyond Now-Next-Later.pdf
Cambridge Product Management Network
 
Unlocking WhatsApp Marketing with HubSpot: Integrating Messaging into Your Ma...
Unlocking WhatsApp Marketing with HubSpot: Integrating Messaging into Your Ma...Unlocking WhatsApp Marketing with HubSpot: Integrating Messaging into Your Ma...
Unlocking WhatsApp Marketing with HubSpot: Integrating Messaging into Your Ma...
Niswey
 
GKohler - Retail Scavenger Hunt Presentation
GKohler - Retail Scavenger Hunt PresentationGKohler - Retail Scavenger Hunt Presentation
GKohler - Retail Scavenger Hunt Presentation
GraceKohler1
 
Dpboss Matka Guessing Satta Matta Matka Kalyan Chart Indian Matka
Dpboss Matka Guessing Satta Matta Matka Kalyan Chart Indian MatkaDpboss Matka Guessing Satta Matta Matka Kalyan Chart Indian Matka
Dpboss Matka Guessing Satta Matta Matka Kalyan Chart Indian Matka
➒➌➎➏➑➐➋➑➐➐Dpboss Matka Guessing Satta Matka Kalyan Chart Indian Matka
 
Satta Matka Dpboss Kalyan Matka Results Kalyan Chart
Satta Matka Dpboss Kalyan Matka Results Kalyan ChartSatta Matka Dpboss Kalyan Matka Results Kalyan Chart
Satta Matka Dpboss Kalyan Matka Results Kalyan Chart
Satta Matka Dpboss Kalyan Matka Results
 
Satta Matka Dpboss Kalyan Matka Results Kalyan Chart
Satta Matka Dpboss Kalyan Matka Results Kalyan ChartSatta Matka Dpboss Kalyan Matka Results Kalyan Chart
Satta Matka Dpboss Kalyan Matka Results Kalyan Chart
Satta Matka Dpboss Kalyan Matka Results
 
AI Transformation Playbook: Thinking AI-First for Your Business
AI Transformation Playbook: Thinking AI-First for Your BusinessAI Transformation Playbook: Thinking AI-First for Your Business
AI Transformation Playbook: Thinking AI-First for Your Business
Arijit Dutta
 
1 Circular 003_2023 ISO 27001_2022 Transition Arrangments v3.pdf
1 Circular 003_2023 ISO 27001_2022 Transition Arrangments v3.pdf1 Circular 003_2023 ISO 27001_2022 Transition Arrangments v3.pdf
1 Circular 003_2023 ISO 27001_2022 Transition Arrangments v3.pdf
ISONIKELtd
 
Satta Matka Dpboss Kalyan Matka Results Kalyan Chart
Satta Matka Dpboss Kalyan Matka Results Kalyan ChartSatta Matka Dpboss Kalyan Matka Results Kalyan Chart
Satta Matka Dpboss Kalyan Matka Results Kalyan Chart
Satta Matka Dpboss Kalyan Matka Results
 
Satta Matka Dpboss Kalyan Matka Results Kalyan Chart
Satta Matka Dpboss Kalyan Matka Results Kalyan ChartSatta Matka Dpboss Kalyan Matka Results Kalyan Chart
Satta Matka Dpboss Kalyan Matka Results Kalyan Chart
Satta Matka Dpboss Kalyan Matka Results
 
Kalyan Chart Satta Matka Dpboss Kalyan Matka Results
Kalyan Chart Satta Matka Dpboss Kalyan Matka ResultsKalyan Chart Satta Matka Dpboss Kalyan Matka Results
Kalyan Chart Satta Matka Dpboss Kalyan Matka Results
Satta Matka Dpboss Kalyan Matka Results
 
DPBOSS NET SPBOSS SATTA MATKA RESULT KALYAN MATKA GUESSING FREE KALYAN FIX JO...
DPBOSS NET SPBOSS SATTA MATKA RESULT KALYAN MATKA GUESSING FREE KALYAN FIX JO...DPBOSS NET SPBOSS SATTA MATKA RESULT KALYAN MATKA GUESSING FREE KALYAN FIX JO...
DPBOSS NET SPBOSS SATTA MATKA RESULT KALYAN MATKA GUESSING FREE KALYAN FIX JO...
essorprof62
 
Satta Matka Dpboss Kalyan Matka Results Kalyan Chart
Satta Matka Dpboss Kalyan Matka Results Kalyan ChartSatta Matka Dpboss Kalyan Matka Results Kalyan Chart
Satta Matka Dpboss Kalyan Matka Results Kalyan Chart
Satta Matka Dpboss Kalyan Matka Results
 
DearbornMusic-KatherineJasperFullSailUni
DearbornMusic-KatherineJasperFullSailUniDearbornMusic-KatherineJasperFullSailUni
DearbornMusic-KatherineJasperFullSailUni
katiejasper96
 
Pitch Deck Teardown: Kinnect's $250k Angel deck
Pitch Deck Teardown: Kinnect's $250k Angel deckPitch Deck Teardown: Kinnect's $250k Angel deck
Pitch Deck Teardown: Kinnect's $250k Angel deck
HajeJanKamps
 
Enhancing Adoption of AI in Agri-food: Introduction
Enhancing Adoption of AI in Agri-food: IntroductionEnhancing Adoption of AI in Agri-food: Introduction
Enhancing Adoption of AI in Agri-food: Introduction
Cor Verdouw
 
Registered-Establishment-List-in-Uttarakhand-pdf.pdf
Registered-Establishment-List-in-Uttarakhand-pdf.pdfRegistered-Establishment-List-in-Uttarakhand-pdf.pdf
Registered-Establishment-List-in-Uttarakhand-pdf.pdf
dazzjoker
 

Recently uploaded (20)

Satta Matka Dpboss Kalyan Matka Results Kalyan Chart
Satta Matka Dpboss Kalyan Matka Results Kalyan ChartSatta Matka Dpboss Kalyan Matka Results Kalyan Chart
Satta Matka Dpboss Kalyan Matka Results Kalyan Chart
 
Efficient PHP Development Solutions for Dynamic Web Applications
Efficient PHP Development Solutions for Dynamic Web ApplicationsEfficient PHP Development Solutions for Dynamic Web Applications
Efficient PHP Development Solutions for Dynamic Web Applications
 
Satta Matka Dpboss Kalyan Matka Results Kalyan Chart
Satta Matka Dpboss Kalyan Matka Results Kalyan ChartSatta Matka Dpboss Kalyan Matka Results Kalyan Chart
Satta Matka Dpboss Kalyan Matka Results Kalyan Chart
 
2024.06 CPMN Cambridge - Beyond Now-Next-Later.pdf
2024.06 CPMN Cambridge - Beyond Now-Next-Later.pdf2024.06 CPMN Cambridge - Beyond Now-Next-Later.pdf
2024.06 CPMN Cambridge - Beyond Now-Next-Later.pdf
 
Unlocking WhatsApp Marketing with HubSpot: Integrating Messaging into Your Ma...
Unlocking WhatsApp Marketing with HubSpot: Integrating Messaging into Your Ma...Unlocking WhatsApp Marketing with HubSpot: Integrating Messaging into Your Ma...
Unlocking WhatsApp Marketing with HubSpot: Integrating Messaging into Your Ma...
 
GKohler - Retail Scavenger Hunt Presentation
GKohler - Retail Scavenger Hunt PresentationGKohler - Retail Scavenger Hunt Presentation
GKohler - Retail Scavenger Hunt Presentation
 
Dpboss Matka Guessing Satta Matta Matka Kalyan Chart Indian Matka
Dpboss Matka Guessing Satta Matta Matka Kalyan Chart Indian MatkaDpboss Matka Guessing Satta Matta Matka Kalyan Chart Indian Matka
Dpboss Matka Guessing Satta Matta Matka Kalyan Chart Indian Matka
 
Satta Matka Dpboss Kalyan Matka Results Kalyan Chart
Satta Matka Dpboss Kalyan Matka Results Kalyan ChartSatta Matka Dpboss Kalyan Matka Results Kalyan Chart
Satta Matka Dpboss Kalyan Matka Results Kalyan Chart
 
Satta Matka Dpboss Kalyan Matka Results Kalyan Chart
Satta Matka Dpboss Kalyan Matka Results Kalyan ChartSatta Matka Dpboss Kalyan Matka Results Kalyan Chart
Satta Matka Dpboss Kalyan Matka Results Kalyan Chart
 
AI Transformation Playbook: Thinking AI-First for Your Business
AI Transformation Playbook: Thinking AI-First for Your BusinessAI Transformation Playbook: Thinking AI-First for Your Business
AI Transformation Playbook: Thinking AI-First for Your Business
 
1 Circular 003_2023 ISO 27001_2022 Transition Arrangments v3.pdf
1 Circular 003_2023 ISO 27001_2022 Transition Arrangments v3.pdf1 Circular 003_2023 ISO 27001_2022 Transition Arrangments v3.pdf
1 Circular 003_2023 ISO 27001_2022 Transition Arrangments v3.pdf
 
Satta Matka Dpboss Kalyan Matka Results Kalyan Chart
Satta Matka Dpboss Kalyan Matka Results Kalyan ChartSatta Matka Dpboss Kalyan Matka Results Kalyan Chart
Satta Matka Dpboss Kalyan Matka Results Kalyan Chart
 
Satta Matka Dpboss Kalyan Matka Results Kalyan Chart
Satta Matka Dpboss Kalyan Matka Results Kalyan ChartSatta Matka Dpboss Kalyan Matka Results Kalyan Chart
Satta Matka Dpboss Kalyan Matka Results Kalyan Chart
 
Kalyan Chart Satta Matka Dpboss Kalyan Matka Results
Kalyan Chart Satta Matka Dpboss Kalyan Matka ResultsKalyan Chart Satta Matka Dpboss Kalyan Matka Results
Kalyan Chart Satta Matka Dpboss Kalyan Matka Results
 
DPBOSS NET SPBOSS SATTA MATKA RESULT KALYAN MATKA GUESSING FREE KALYAN FIX JO...
DPBOSS NET SPBOSS SATTA MATKA RESULT KALYAN MATKA GUESSING FREE KALYAN FIX JO...DPBOSS NET SPBOSS SATTA MATKA RESULT KALYAN MATKA GUESSING FREE KALYAN FIX JO...
DPBOSS NET SPBOSS SATTA MATKA RESULT KALYAN MATKA GUESSING FREE KALYAN FIX JO...
 
Satta Matka Dpboss Kalyan Matka Results Kalyan Chart
Satta Matka Dpboss Kalyan Matka Results Kalyan ChartSatta Matka Dpboss Kalyan Matka Results Kalyan Chart
Satta Matka Dpboss Kalyan Matka Results Kalyan Chart
 
DearbornMusic-KatherineJasperFullSailUni
DearbornMusic-KatherineJasperFullSailUniDearbornMusic-KatherineJasperFullSailUni
DearbornMusic-KatherineJasperFullSailUni
 
Pitch Deck Teardown: Kinnect's $250k Angel deck
Pitch Deck Teardown: Kinnect's $250k Angel deckPitch Deck Teardown: Kinnect's $250k Angel deck
Pitch Deck Teardown: Kinnect's $250k Angel deck
 
Enhancing Adoption of AI in Agri-food: Introduction
Enhancing Adoption of AI in Agri-food: IntroductionEnhancing Adoption of AI in Agri-food: Introduction
Enhancing Adoption of AI in Agri-food: Introduction
 
Registered-Establishment-List-in-Uttarakhand-pdf.pdf
Registered-Establishment-List-in-Uttarakhand-pdf.pdfRegistered-Establishment-List-in-Uttarakhand-pdf.pdf
Registered-Establishment-List-in-Uttarakhand-pdf.pdf
 

Business Valuation 101: Demystifying Business Valuation for Small Business Owners

  • 1. Business Valuation 101 Demystifying Business Valuation for Small Business Owners Theresa Zeidler- Shonat Director of Valuation Services 1
  • 2. What is Business Valuation? 2
  • 3. The Short Answer • Business valuation is a process and a set of procedures used to estimate the economic value of an owner's interest in a business. 3
  • 5. Let’s Start with Terminology… • What’s the difference between “Valuation” and “Appraisal?” 5
  • 6. Definition: Valuation • Valuation – (noun) the act or process of determining the value of a business, business ownership interest, security, or intangible asset. 6
  • 7. Definition: Appraisal • Appraisal - (noun) the act or process of developing an opinion of value; an opinion of value. 7
  • 8. WHEN DO YOU NEED A VALUATION? 8
  • 9. Estate and Gifting • Death of business owner • Transfer of business ownership to the next generation through gift of shares 9
  • 10. Divorce • A party in the divorce holds an equity position in a closely-held company, or owns intellectual property that is considered part of the divisible marital property (“undivided one-half marital property interest”) 10
  • 11. Lending Scenarios • Some SBA loans require a business valuation if a specific set of conditions exist • Intangible assets are being used as collateral and the lender wants an idea of their worth 11
  • 12. Business Planning • Strategic planning - company is considering several options and is wanting to determine the impact of several scenarios • Succession planning • Exit Planning • Impact of expanding into new industry or making an acquisition 12
  • 13. Financial Reporting • Company has just been acquired or made an acquisition: purchase price allocations (ASC 805) – Total purchase consideration is allocated to the acquired assets. – Includes intangible asset valuations 13
  • 14. Financial Reporting • Company has goodwill or indefinite- lived intangible assets on their balance sheet from a previous acquisition - impairment testing (ASC 350) 14
  • 15. Financial Reporting • Company holds a minority interest in another company and is required to mark that investment to market 15
  • 16. Stock-Based Compensation • 409A valuations. – Private companies are required by the IRS (Section 409A) to show that their common stock options are issued at fair market value, and therefore must conduct a formal valuation opinion at least once every 12 months to avoid potential tax penalties. 16
  • 17. Stock-Based Compensation • ASC 718 valuations. – ASC 718 requires that all equity awards granted to employees, consultants, and board members be accounted for at "fair value" and then expensed over the vesting term of the grant. – This can become more difficult as additional grants are made and vesting and forfeitures add complexity to the calculations. 17
  • 18. Intangible Asset / Intellectual Property Monetization • Company is considering monetizing assets - either through use as collateral or licensing the asset to a third party • Company is contemplating sale of the asset and need help determining a price • Company is contemplating purchase of an asset and looking to determine if price is fair 18
  • 19. Buy-Sell Agreement Development • Most buy-sell agreements have a provision for determining the price at which an interest in the company is sold. – Basing this on a valuation, or requiring a valuation in the buy-sell agreement mitigates risk 19
  • 20. Shareholder Buyouts • Not all companies have a buy-sell agreement in place. • Business valuations can provide a good point to begin negotiations, and smooth the process. 20
  • 21. 21 You’ve Decided to do a Business Valuation. What Happens Next?
  • 22. Business Valuation Timeline 22 I. •Project Scoping and Engagement Letter •This typically takes a few days between initial discussions and the engagement letter II. •Information and Data Request •This length of this step depends on how quickly client responds with requested information III. •Initial Modeling and industry research •This portion should take 4 to 6 days to complete IV. •Follow up questions for client •Questions arise during step III. Timing depends on client response time. V. •Finish model and finalize report •A few days to a week depending on responses received in Step IV. VI. •Submit final report to client •In total process typically takes 3 to 6 weeks.
  • 24. So What is “Value?” • “Value” expresses an economic concept. As such, it is never a fact but always an opinion of the worth of a property (asset) • “Value” should always be qualified; e.g., “fair market value,” “liquidation value,” or “investment Value 24
  • 25. Definition: Value (USPAP, paraphrased) • Value is the monetary relationship between properties (assets) and those who buy, sell, or use those properties (assets) 25
  • 26. The “Definitions of Value” • Fair Market Value • Fair Value • Investment Value • Intrinsic Value • Liquidation Value –Orderly –Forced 26
  • 27. Fair Market Value • “The price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts. Court decisions frequently state in addition that both the hypothetical buyer and seller are assumed to be able, as well as willing, to trade and to be well informed about the property and concerning the market for such property.” 27 Source: IRS Revenue Ruling 59-60
  • 28. Fair Market Value • "The price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arms length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant 28 Source: The International Glossary of Business Valuation Terms
  • 29. Fair Value (Financial Reporting) • "The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date." 29 Source: ASC 820
  • 30. Fair Value • Can also be defined on a state-by- state basis in divorce matters. 30
  • 31. Investment Value • "The value to a particular investor based on individual requirements and expectations." 31 Source: The International Glossary of Business Valuation Terms
  • 32. Intrinsic Value • "The value that an investor considers, on the basis of an evaluation or available facts, to be the "true" or "real" value that will become the market value when other investors reach the same conclusion. When the term applies to options, it is the difference between the exercise price or strike price of an option and the market value of the underlying security." 32 Source: The International Glossary of Business Valuation Terms
  • 33. Liquidation Value • The most probable price that a specified interest in real property is likely to bring under extreme compulsion to sell. 33 Source: Paraphrased from the Appraisal Institute, The Dictionary of Real Estate Appraisal
  • 34. 34 What (Exactly) is Being Valued Here?
  • 35. The Value Equation 35 + + + The Business Enterprise Equation Value of Business Enterprise Value of Net Working Capital Value of Equity Value of Tangible Assets Value of Interest- Bearing DebtValue of Intangible Assets BEV = Value of Underlying Assets = Value of Invested Capital = =
  • 36. Invested Capital • Invested capital (sometimes called business enterprise value) is the value of the entire business – Think of it like the price you would receive if you were to sell the whole business today • Its equal to the value of the equity in the business plus the value of the debt. 36
  • 37. Equity • The value of the business available to equity holders after debt service. • Equity can be valued as a 100% interest, or a fractional interest. 37
  • 38. Levels of Value • Business Enterprise Value (Total Invested Capital) • Equity Value, 100% • Equity Value, Non-controlling • Equity Value, Non-marketable • Equity Value, non-controlling, non- marketable • Equity Value, non-controlling, non- marketable, non-voting 38
  • 39. Intangible Assets • Intellectual Property (IP) • Marketing Intangibles • Contract-Based Intangibles • Customer-Relationship-Based Intangibles • Artistic Intangibles 39
  • 40. 40 Does WHEN a Valuation is Done Make a Difference?
  • 41. 41
  • 42. Point in time Measurement • Value Changes over time • “Valuation Date” is important 42
  • 43. Some Valuations have Date Requirements or Deadlines • Estate tax: date of death • Financial Reporting: fiscal year end 43
  • 44. Let too much time elapse… … and gathering information can be like an archaeological 44
  • 45. 45 How Much Valuation Do I Need?
  • 46. Opinion of Value (Appraisal) • a. An Appraisal is the act or process of determining the value of a business, business ownership interest, security, or intangible asset. • b. The objective of an appraisal is to express an unambiguous opinion as to the value of a business, business ownership interest, security or intangible asset which opinion is supported by all procedures that the appraiser deems to be relevant to the valuation. • c. An appraisal has the following qualities: • (1) Its conclusion of value is expressed as either a single dollar amount or a range • (2) It considers all relevant information as of the appraisal date available to the appraiser at the time of performance of the valuation • (3) The appraiser conducts appropriate procedures to collect and analyze all information expected to be relevant to the valuation • (4) The valuation considers all conceptual approaches deemed to be relevant by the appraiser 46
  • 47. Calculation of Value • Calculation engagement, as defined in the Statement on Standards for Valuation Services (SSVS) • A valuation analyst performs a calculation engagement when – (1) the valuation analyst and the client agree on the valuation approaches and methods the valuation analyst will use and the extent of procedures the valuation analyst will perform in the process of calculating the value of a subject interest (these procedures will be more limited than those of a valuation engagement) and – (2) the valuation analyst calculates the value in compliance with the agreement. The valuation analyst expresses the results of these procedures as a calculated value. The calculated value is expressed as a range or as a single amount. • A calculation engagement does not include all of the procedures required for a valuation engagement and were a valuation engagement to be performed, the results may be different. 47
  • 48. 48 Attributes Opinion of Value Calculation of Value Acceptance Accepted by Courts X Accepted by IRS X Basis for Expert Testimony X Analysis Includes Income Approacjh X Sometimes Market Approach X Sometimes Cost Approach X Sometimes Economic and Market Conditions X Past Sales of Interest in Business X Financial Benchmarks X Market Research X Industry Research X Macro Risk Assessment X Company-Specific Risk Assessment X Minority and Marketability Discounts when appropriate to subject interest when appropriate to subject interest Calculation of Value vs. Opinion of Value
  • 50. Three Approaches to Value 50 Market Approach Asset Approach Income Approach Value Conclusion
  • 52. Market Approach Theory • The value of the company (or asset) reflects the price at which comparable companies (or assets) are purchased under similar circumstance. • Requires that comparable transactions be available. 52
  • 53. Market Approach - Methods • Guideline publicly-traded company method – Based on similar and relevant comparable entities – Adjustments are often necessary to make the comparables more similar • Comparative transaction method – Based on actual transactions of similar entities 53
  • 54. Public Company Method • Valuation relies on information from comparable publicly traded companies • Should have several “comparables” • Adjustments may be necessary to make them more comparable or to normalize the comps • Sometimes it just doesn’t make sense to use public companies 54
  • 55. Comparative Transaction Methods • Transaction database multiples • Prior “arm’s- length” transactions • Rules of thumb 55
  • 56. Comparability? • Public companies tend to be much larger, have greater resources and access to capital – Public company multiples often need to be adjusted • Private companies – usually don’t know terms of transaction, which can impact price 56
  • 58. Asset Approach Theory • The value of the company is estimated as a function of the current cost to purchase or replace all assets held within the operating entity. • It is based upon the principal of substitution, which states that no prudent investor would pay more for a company (or asset) than the amount to re-create or buy it. 58
  • 59. Asset Approach • Useful for: –Asset-intensive businesses –Real estate holding companies –Entities that hold mostly securities (or cash) –Some contracting businesses that bid for work 59
  • 60. Asset Approach • Often requires outside appraisals • Must identify non-operating assets like excess cash or obsolete inventory • Company may have intangible assets that contribute to business value that aren’t listed on the books 60
  • 62. Income Approach Theory • Predicated upon the value of the future cash flows that an asset will generate over its remaining useful life. • It involves the projection of the cash flows the company (or asset) is expected to generate. • These cash flows are then converted into a present value equivalent through discounting. 62
  • 63. Income Approach - Methods • Discounted cash flow method • Capitalization of earnings method • Other methods exist, but are less commonly used 63
  • 64. Discounted Cash Flow Method • Converts a stream of projected earnings or other benefit stream into present value by applying a discount rate • The earnings from each period are discounted to present value and then a “terminal” value is added to arrive at the total value 64
  • 65. 65 FCFFn (1 + g) (1 + WACC)0.5 PV = FCFF1 + FCFF2 + … + FCFFn + WACC - g (1 + WACC)0.5 (1 + WACC)1.5 ( 1+ WACC)n - 0.5 (1+WACC)n Where: PV = Present Value FCFF = Free Cash Flow to the Firm n = Number of Periods in Discrete Projection Period g = Long-Term Sustainable Growth Rate in FCF WACC= Weighted Average Cost of Capital Discounting Formula
  • 66. Present Value 66 Value today Years of saving $1.00 1 year $1.00 2 years $1.00 3 years Amount received Years till cash flow $1.10 1 year $1.21 2 years $1.33 3 years $1.00 $1.00 What will savings be worth? Examples of Present Value $1.21 $1.33 $1.10 Saving Today at 10% Discounting Future Cash Flows at 10% What is this cash flow worth today? $1.00
  • 67. Projected Earnings • Predict future performance based on analysis of historical performance and current and expected operating and industry conditions – Various tools are available to assist the valuator in predicting future performance – Common sense and informed judgment must be the deciding factors 67
  • 68. What Is the Discount Rate? • The rate of return, or cost of capital, necessary to convert a monetary sum, payable or receivable in the future, into present value 68
  • 69. How Do We Develop a Discount Rate? • Weighted Average Cost of Capital (WACC) – Capital Asset Pricing Model (CAPM) • Published industry standards 69
  • 70. Weighted Average Cost of Capital 70 WACC = (Ke x We) + (Kd x Wd) Where: Ke = Cost of Equity Kd = Cost of Debt We = Weight of Equity Wd = Weight of Debt WACC Formula
  • 71. Cost of Equity 71 Cost of Equity = Rf + β(RPm) + RPs + RPu Where: Rf = β = RPm = RPs = RPu = (1) Modified Capital Asset Pricing Model Risk premium for specific company ("unsystematic risk) Risk premium for small size Cost of Equity Formula (1) Rate of Return for a risk-free security as of the valuation date Subject company's beta coefficient Equity risk premium for the market
  • 72. Cost of Equity 72 Cost of Equity = RPm + Rf + RPs + IP + RPu Where: RPm = Rf = RPs = IP = RPu = (1) Modified Capital Asset Pricing Model - Build-Up Method Risk premium for specific company ("unsystematic risk") Cost of Equity Formula (1) Equity risk premium for the market Rate of Return for a risk-free security as of the valuation date Risk premium for small size Industry Risk Premium
  • 73. Example of a Build-Up Method to Developing the WACC Risk-Free Rate (20-year Treasury-Bill) 2.5% Equity Risk Premium 7.0% Size Premium 3.5% Company and Industry Specific Risk Premium 5.0% Total Equity Discount Rate 18.0% Less: Long-Term Growth 5.0% Equity Capitalization Rate 13.0% 73
  • 74. Capitalization of Earnings Method • Like other income approach methods, this is based on the principle that the value of the business can be estimated by the future benefits received from ownership of the business. • Future benefits of ownership are assumed to be reliably predicted by past performance, • Only appropriate for companies in stable growth phases 74
  • 75. Capitalization of Earnings Method 75 PV = NCF1 k-g Where: PV = NCF1 = k = g = Present value Net Cash Flow expected in period 1, the period immediately following the valuation date Weighted Average Cost of Capital Expected long-term growth rate in net cash flow Capitalization of Earnings Formula
  • 76. Discounted Earnings Method vs. Capitalization Method • DCF is applied when – Future performance is not expected to be consistent and/or stable • Capitalization is applied when – Company performance is expected to be stable or grow at a stable rate 76
  • 78. 78 Factors that Affect Business Value External Business owner can't really change these Internal Business owner can change these and impact business value
  • 79. External Factors That Impact Company Value Increase Value • Expanding markets • A dominant market position • Barriers to entry • Expanding industry • Expanding economy • Shift in consumer preference to company product Decrease Value • Shrinking market • Challenged market share • Lack of barriers to entry • Contracting industry • Contracting Economy • Shift in consumer preference away from company product 79
  • 80. Market Timing 80 SIC Code Industry Pre-Recession(1) Recession (2) Post-Recession (3) 5812 Eating Places 0.49 0.38 0.35 7231 Beauty Shops 0.49 0.40 0.36 7349 Building Cleaning and Maintenance Services 0.68 0.65 0.65 7389 Business Services, Not Elsewhere Classified 1.01 0.99 0.93 7538 General Automotive Repair 0.48 0.42 0.39 7991 Physical Fitness Facilities 0.66 0.76 0.64 8299 Schools and Education Services, NEC 1.07 0.66 0.94 Notes: (1) Pre-recession is defined as 1/1/03 through 11/31/07 (2) Recession is defined as 12/1/07 through 8/31/09 (3) Post-recession is defined as 9/1/09 through 12/1/14 Transactions Multiples Throughout the Business Cycle MVIC to Sales
  • 81. Internal Factors That Impact Company Value Increase Value • Organized up-to-date financials • Strong gross margins • Projections of strong cash flow • Sufficient working capital to support operations • Systems and structures • Cross trained employee base Decrease Value • Declining Sales • Inconsistent yearly financial performance • Unreported cash, or off-balance sheet loans • Lack of key employees • No formalized business and marketing plan 81
  • 82. DISCOUNTS FOR LACK OF CONTROL AND MARKETABILITY 82
  • 83. Levels of Value 83 Investment or Synergistic Value Control Value (Freely-Traded) Minority Value (Freely-Traded) Non-Marketable, Minority Interest Value $14 $12 $10 $7 Marketable, control value Marketable, control value Marketable, non-control value Non-marketable, non-control value
  • 84. Discounts & Premiums • Discount for lack of control • Premium for control • Discount for lack of marketability • Key person discount • Depend on the interest to be valued and the techniques used to establish the value conclusion 84
  • 85. Value of Control • Control attributes – Hire and fire – Distribute earnings/declare dividends – Buy and sell assets – Enter into contracts – Liquidate the business – Set strategic objectives and goals – Set compensation and performance standards 85
  • 86. Lack of Control • Lack of control in a closely held company implies you are at the mercy of the controlling owner(s) • Substantial discounts may be necessary to attract an investor to purchase a minority interest in a closely held company 86
  • 87. Determination of Discount/Premium • Control premium studies • Mergerstat Control Premium Studies – Measures how much over the market price is paid to gain control of a company – Looks at the price of the stock before and after the announcement of an acquisition or merger 87
  • 88. Marketability • Ability to convert ownership interest to cash • Time required to do so affects the level of marketability • Other factors that affect marketability – Distributions of earnings – Active market or industry roll-up – Key person – Number and profile of owners – Restrictions on transfer of stock 88
  • 89. Discount for Lack of Marketability • From Pre-IPO studies – Comparing the price of a company’s stock before and after the announcement of “going public” • From Restricted Stock Studies – Compare Letter Stock restricted from trading for a certain time period to its publicly traded counterpart 89
  • 90. 90 Marketable, control value 5,000,000$ Discount for lack of control 20% 1,000,000$ Marketable, minority value 4,000,000$ Discount for lack of marketability 30% 1,200,000$ Non-Marketable, minority value 2,800,000$ Example of Lack of Control and Lack of Marketablility Discounts
  • 91. WHAT ARE THE ADJUSTMENTS TO MY FINANCIAL DATA AND WHY HAVE YOU DONE THEM? 91
  • 92. Adjustments to Financial Statements • One objective of financial statement analysis is to provide a financial picture that can be reliably used to estimate future performance. 92
  • 93. Adjustments to Financial Statements • Historical financial statements may need to be adjusted for certain items that distort the picture of the true operating performance of the business. 93
  • 94. Reasons for Financial Adjustments • To develop a starting point from which to predict future earnings • To present historical financial information on a normalized basis • To adjust for accounting practices that are a departure from industry or GAAP standards 94
  • 95. Reasons for Financial Adjustments • To facilitate comparison of a given company to itself, to other companies within the same industry, or to an accepted industry standard. • To compare the debt and/or capital structure of the company to that of its competition or peers • To compare compensation with industry norms 95
  • 96. What is Adjusted? • Unusual items • Nonrecurring items • Extraordinary items (both unusual and nonrecurring) • Non-operating items • Items affected by changes in accounting principle • Items that are not in conformance with GAAP • Degree of ownership interest, including whether interest has control 96
  • 97. Unusual Items • Events or transactions that posses a high degree of abnormality • Unrelated to, or only incidentally related to, the ordinary and typical activities of the entity 97
  • 98. Nonrecurring Items • Events or transactions that are not reasonably expected to recur in the foreseeable future 98
  • 99. Extraordinary items • Events or transactions that are distinguished by their unusual nature and infrequency of occurrence • Item must be both unusual and nonrecurring to be classified as extraordinary 99
  • 100. Extraordinary items • Events or transactions that are distinguished by their unusual nature and infrequency of occurrence • Item must be both unusual and nonrecurring to be classified as extraordinary 100
  • 101. Unusual, Nonrecurring, and Extraordinary items • Strikes and other types of work stoppages • Litigation expense or recoveries 101
  • 102. Unusual, Nonrecurring, and Extraordinary items • Uninsured losses due to unforeseen disasters like fire or flood • One-time realization of revenues or expenses due to nonrecurring contracts • Gain or loss on the sales of a business unit or business assets 102
  • 103. Unusual, Nonrecurring, and Extraordinary items • Discontinuation of operations • Insurance proceeds received on the life of a key person or from property or casualty claim 103
  • 104. Non-Operating Items • Excess cash • Marketable securities (in excess of reasonable needs of the business) • Real estate (if not used in business operations) • Private planes, entertainment, or sports facilities • Antiques, private collections, etc. 104
  • 105. 105 Changes in Accounting Principal • A change in the method of pricing inventory (e.g., LIFO to FIFO) • A change in the method of depreciating previously-recorded assets (e.g., straight- line to MACRS)
  • 106. Changes in Accounting Principal • A change in the method of accounting for long-term construction-type contracts • A change to or from the full-cost method of accounting in extractive industries 106
  • 107. Nonconformance with GAAP • Financial statements prepared on a tax or cash accounting basis • Unrecorded revenue in cash business • Inadequate bad debt reserve 107
  • 108. Nonconformance with GAAP • Understated amounts of inventory, failure to write off obsolete or slow moving inventory, etc. • Unrecorded liabilities such as capital lease obligations, workforce-related costs (wages, sick/vacation pay), deferred income taxes • Capitalization/expense policies for fixed assets and prepaid expenses 108
  • 109. What Are Adjustments Based On? • Industry ratios • Market wage data • Company historical data 109
  • 111. What is Goodwill? Two commonly used definitions of goodwill - The bundle of all intangible assets of a company - The residual intangible value remaining after all identifiable intangible assets have been valued. 111
  • 112. What Is Goodwill? • Entity goodwill is the goodwill that attaches to the business enterprise. 112
  • 113. What Is Goodwill? • Personal Goodwill is the goodwill that attaches to the persona and personal efforts of the individual. – Generally considered to be difficult to transfer, if it is transferable at all 113
  • 114. When Does Goodwill Matter? • Divorce Valuations • Financial Reporting 114
  • 115. Where Does Personal Goodwill Arise? • Traditionally, the issue of personal goodwill arose almost exclusively in the context of a professional practice owner. • The line gets “fuzzy” in the commercial business arena • Personal goodwill in a commercial business might be more “key person risk” than actual personal goodwill • Look for special relationships with customers or suppliers 115
  • 116. Separating Personal from Entity • No generally accepted methodologies to divide goodwill into personal and entity components – Methods to calculate personal goodwill can depend on case or jurisdiction – Multi-Attribute Utility Model – With and Without Analysis – Excess Earnings 116
  • 117. Factors the Impact Personal Goodwill • Age and health of professional • Earning power • Reputation • Comparative success • Practice duration • Marketability • Types of Clients and Services 117
  • 118. Factors that Impact Personal Goodwill • Location and Demographics • Fees • Source of New Clients • Production • Workforce • Competition • Non-Compete Agreements 118
  • 120. Valuation isn’t Taught in Law School • Judges don’t necessarily understand valuation theory – Contradictory Case Law proves this out – Valuation report needs to make valuation theory and the intuition behind it crystal clear 120
  • 121. Short Window in which to Obtain Info• Need to anticipate all future info needs as part of discovery process 121
  • 122. Short Window in which to Obtain Info• Valuation Process Often Goes Like This: 1. Request info 2. Go through info and determine if additional info is required 3. Request follow on info 4. Repeat step two/three as needed 5. Valuation and report writing 6. Last round of questions to cover issues that came up in the valuation process/dot the i’s and cross the t’s. 7. Finalize and issue report • Steps 3, 4, and 6 can be challenging 122
  • 123. Short Window in which to Obtain Info• If you miss key info, you are out of luck 123
  • 124. Problematic Information Flow • Spouse may be unwilling to share info, or actively attempting misdirection 124
  • 125. Incentive to Hide Value • Perceived advantage to making business look less valuable • Postpone signing contracts that guarantee business income • Defer follow-on rounds of financing • “Business Shift” Syndrome 125
  • 126. “BS” • A sudden shift in business performance around the time of the divorce filing. • Business owner trying to make business appear less valuable. • Could also be the result of macroeconomic or industry conditions. Careful assessment is necessary 126
  • 127. In summary… • Valuation is a process that leads to an opinion of value. • There are many scenarios in which a valuation is needed or helpful. • There are three approaches to value, but many valuation methods. • You can value invested capital, equity, or individual assets. • Certain situations have special considerations to be aware of. 127
  • 129. 129
  • 130. Theresa Zeidler-Shonat Director of Valuation Services Smith & Gesteland, LLP 608.828.3154 theresa.zeidler-shonat@sgcpa.com 130

Editor's Notes

  1. Thanks Neil & all attendees For any attorneys online, this webinar has been pre approved for one hour of CLE Aunt Gertrude’s Green Bean Casserole Story Image: © CGinspiration - Fotolia.com
  2. Before we get into the long answer – and the reason we suspect you are here, lets do a quick poll question Image: © Anatoly Maslennikov - Fotolia.com
  3. Image: © aarstudio - Fotolia.com
  4. Image: © Pakhnyushchyy - Fotolia.com
  5. Image: © Pakhnyushchyy - Fotolia.com
  6. Clock Shaded by rihard https://openclipart.org/detail/2998/clock-+-calendar-by-rihard-2998 Public Domain Respond to any information requests and quickly and completely as you can. Ask questions of the valuator. This may seem counterintuitive but you know your business better than anyone else. If something seems to be an issue not in the model ask about it. Understand the assumptions the valuator is making. These will give you a framework to understanding the valuators conclusion of value.
  7. Image: © Anatoly Maslennikov - Fotolia.com
  8. Image: © Pakhnyushchyy - Fotolia.com
  9. Image: © Pakhnyushchyy - Fotolia.com “Value” expresses an economic concept. As such, it is never a fact but always an opinion of the worth of a property (asset) “Value” should always be qualified; e.g., “fair market value,” “liquidation value,” or “investment Value
  10. Image: © Les Cunliffe - Fotolia.com
  11. Business Enterprise Value (Total Invested Capital)   The value of the business enterprise, the total value available to all debt and equity holders.       Equity Value, 100% The value of the business available to equity holders after debt service, when the equity holders have both control over business operations and the ability to market the company. Equity Value, Non-controlling   The value of the equity in the business after discounts for lack of control over day to day operations and dividends or distributions have been applied; typically applied to any ownership interest of less than 50% equity.       Equity Value, Non-marketable The value of the equity in the business after a discount for the owner's relative inability to convert the ownership interest into cash in a reasonable amount of time; typically applied to all privately-held companies. Equity Value, non-controlling, non-marketable   The value of the equity in the business after discounts for lack of control over day to day operations and dividends or distributions, and a discount for the owner's relative inability to convert the ownership interest into cash in a reasonable amount of time have been applied. Equity Value, non-controlling, non-marketable, non-voting The value of the equity in the business after discounts for lack of control over day to day operations and dividends or distributions, a discount for the owner's relative inability to convert the ownership interest into cash in a reasonable amount of time, and a discount for lack of voting rights have been applied. Image: © pupes1 - Fotolia.com
  12. © chrisdorney - Fotolia.com
  13. Image: © hompratun - Fotolia.com
  14. Image: © Daniele Depascale - Fotolia.com
  15. Death by Powerpoint!! Included all of the text because the slide deck will be available for download after the webinar, and this might be useful to refer back to.
  16. Calculation of value – limited set of valuation procedures. Results in a calculated value, not an opinion of value Opinion of Value (or Appraisal)
  17. Image: © Death to Stock Photos
  18. Market Approach—determines the value by comparing the subject company to other, similar companies in the market. Asset Approach—determines the value by looking at the fair market value of the company’s assets and liabilities. i.e., what the company owns less what it owes. Income Approach—determines the present value of all the expected future benefits of owning the interest. There are several methods under each of these general approaches. The methods apply certain techniques, formulas and/or assumptions to indicate a value. Image: © dvarg - Fotolia.com
  19. Guideline method—difficult to find real comps. Lots of information available on public companies but they tend not to be very similar to most closely held companies. They should be similar in: Revenues, earnings, assets, capital structure, dividend payout ratio or other measures. Adjustments may be necessary to make them more similar. Produces a marketable minority value that needs to be adjusted for the fact that our subject company is not freely traded on a public exchange or over the counter. Transaction method is more of a statistical approach that uses averages of many similar transactions Not much information about companies or the transactions. Must have sufficient transactions to be statistically significant—usually more than 10 but it depends on how “similar” and relevant the transactions are. Often used to support other approaches; as a sanity check. May also look at actual transactions in the subject company’s stock if they are at arm’s length—to 3rd parties.
  20. Should have several “comparables” Adjustments may be necessary to make them more comparable or to normalize the comps Sometimes it just doesn’t make sense to use public companies Image Bull and Bear by Tavin public domain https://openclipart.org/detail/26350/bull-and-bear-by-tavin
  21. There are several transaction databases so it is important to select the one that is most appropriate for the subject valuation Less than arm’s length transactions should be considered but not relied upon to estimate a value Rules of thumb are often used by business brokers © madpixblue - Fotolia.com
  22. According to OneSource: 16% of publicly traded companies have sales under $10 million 13% have assets less than $10 million 50% have sales less than $90 million Median market cap is $62 million with 25% less than $11 million Almost ½ (47%) of all public companies lost money in 2001 and only 18% had profits greater than 10% If the subject company is very large or operates on similar financial terms, comparables may be used to establish a value.
  23. Image:
  24. Values a business based on the difference between the FMV of its assets and liabilities Good method for valuing non-operating assets or businesses such as holding or investment companies. Also good for valuing businesses with continuing losses that could or should be liquidated Represents a floor value for the total entity. Not appropriate for valuing intangible assets such as patents unless replacement value is determined. Does not take into account the operating earnings of the business. Some manufacturing concerns that are asset heavy or, for example, an excavating company that bids for work and has very expensive excavating equipment. Not typically used in retail or service companies but there may be exceptions.
  25. May or may not include the value of intangibles such as goodwill Requires goodwill to be valued separately May or may not include: Transaction costs Inventory Accounts receivable/payable Cash and equivalents Liquidation value must consider the time to liquidate Image: © Les Cunliffe - Fotolia.com
  26. Imagine: © denisismagilov - Fotolia.com
  27. Methods to convert expected future benefits into today’s dollars Capitalization method includes the value of goodwill and/or other intangibles Excess earnings attempts to value goodwill separately
  28. Must understand the concept of present value Requires the ability to predict the future with some certainty or reasonableness We must develop a discount rate to convert the future benefits into today’s dollars
  29. Present Value—review of basics $1.10 to be received in a year, discounted at 10% is worth $1.00 today The discount rate is usually the cost of capital. At what rate can you borrow money? What return can you expect on your savings vs. other investments with higher risk?
  30. There are different “types” of earnings or measures of earnings Some are before and some are after taxes Some include non-cash items like depreciation and some do not Some make adjustments for changes in working capital and capital expenditures and some do not The type of earnings is often defined or suggested, based on the purpose of the valuation. (NACVA Fundamentals—Estimating Future Income, chapter 4, p.1). In some cases, the type of earnings is defined by the method used in estimating the value of the business.
  31. The cost of capital includes the cost of debt and the cost of equity. Remember—it is the cost of capital to the investment, not to the investor when we are talking about fair market value. The cost of capital takes into account the risk associated with the investment. Imag:© bluebay2014 - Fotolia.com
  32. There are modified versions of these formulas, as well. Which formula to use is often determined by the standard of value, what is being valued, and the information available. Most rely on certain assumptions that are generally not true, such as: No consideration of taxes No transactions costs All buyers have perfect knowledge, etc.
  33. Government T-bills are as close to risk free as we can get Equity risk premium is the additional return for investing in the stock market, which is more risky Smaller companies tend to be more risky and therefore demand a higher return on the investment Some industries are more or less risky than the overall market and adjustments may be necessary Company-specific risk premiums may be applied because of the facts and circumstances of the particular subject business that makes it more or less risky than average What are some things that would make it more risky? Key-person Restrictive agreements Poor performance Management turmoil Increased competition or regulation Contingent liabilities Super sensitivity to outside influences such as economy or suppliers Inappropriate capital structure
  34. Discounted Earnings: Project future earnings to a point where they stabilize and then capitalize the last year. If earnings are already stable, simply capitalize the next year’s expected earnings. Remember, historical performance may not be a good indicator of future performance Be sure to analyze all internal and external influences on expected future performance “Capitalization” means to divide by a percentage
  35. The ability to control the investment and the ability to convert it into cash are afforded value The longer an investor is required to hold an investment, the more it may lower the value, as evidenced in the bond market. We will discuss empirical data that supports the different levels of control and marketability Synergy may occur when the purchase of a controlling interest in another company provides one or more of the following: Eliminates competition Improves efficiencies through economies of scale through: purchase discounts lower overhead Opens a distribution network Image: © pupes1 - Fotolia.com
  36. We must determine the most appropriate approach and method of valuation and then adjust the value to match the interest under consideration. Sometimes we are able to apply an approach and method that matches the subject interest and no discounts or premiums are necessary Sometimes only one or the other is applied Determining the discount or premium is the most difficult aspect of valuing a business. (NACVA—Fundamentals – chapter 7, p. 1)
  37. This is only a partial list Can also Merge or buy another business Appoint a board of directors
  38. Some would argue that a controlling interest in a public company is worth no more than a minority interest because management already has a fiduciary responsibility to maximize the value to the shareholders.
  39. Publicly traded stock can be converted to cash in a few days The pool of buyers is much larger for publicly traded securities and transaction fees are low Closely held stock may take a long time or may not be eligible for trade
  40. These studies are the best measure of marketability discount available but they may also include other factors that could affect the price.
  41. Multiplicatively (not additively) i.e., first one, then the other is applied to the result from the first So in the example, the combined discount would be 44%, not 50%
  42. Image: © Berislav Kovacevic - Fotolia.com
  43. Image: © Les Cunliffe - Fotolia.com
  44. Image: © Les Cunliffe - Fotolia.com
  45. Image: © ki33 - Fotolia.com
  46. Image: © ki33 - Fotolia.com
  47. Image: © stokkete - Fotolia.com
  48. Image: © chones - Fotolia.com
  49. Image: © chones - Fotolia.com
  50. Image: © Les Cunliffe - Fotolia.com
  51. Image: © fotomatrix - Fotolia.com
  52. Practitioners close to retirement may have lower personal goodwill Expected future earnings does not continue much longer Health problems that hamper performance reduce personal goodwill Expected future earnings power of practitioner and practice Demonstrated past earnings power can be important to estimating expected future earnings Higher the future earnings, higher the possible goodwill value. Practitioner’s reputation for judgment, skill, and knowledge is vital to goodwill Background and education play a large part in this. Success of the professional and practice in relation to the success of other professionals and practices. Usually measured by earnings of practice Other factors: hours worked, clients/patients seen, standard of living Goodwill is built over time Length of time the practice has been in operation impacts goodwill The marketability of the practice can help determine whether personal or entity goodwill exists. Demand determines marketability – but demand may be for products or services not the specific business Barriers to entry for competition impact entity goodwill – if everyone can do it, goodwill is likely to be low. The types of clients and services and the ways revenue is generated from them impacts goodwill.
  53. A practice located within a short distance of clients may have higher entity goodwill. This is less important for some types of businesses. This can be more important in smaller communities. How does the business charge its customers/clients? What is the impact of an increase or decrease in fees on the business? Would clients leave or stay if fees changed? Are clients willing to pay higher fees because of the practitioner providing the service? Referral base is an important consideration in goodwill If referrals come from a large number of current clients, there is likely more entity goodwill than personal If referrals are primarily generated by a specific practitioner, personal goodwill is likely to be higher. Practitioners that work more are likely to have more personal goodwill Practitioners that spend more time interacting with clients are likely to have more personal goodwill The impact of non-owner professionals on client/customer perceptions impacts goodwill. The degree of competition will affect the levels and types of goodwill present. Two schools of thought: Non-compete agreement represents value of personal goodwill Non-compete agreement transfers the value of personal goodwill to the company and converts it to entity goodwill.
  54. Image: © ninog - Fotolia.com
  55. Image: © CYCLONEPROJECT - Fotolia.com
  56. Image: © WavebreakMediaMicro - Fotolia.com
  57. Image: © simonkr - Fotolia.com
  58. Image: © Lina - Fotolia.com
  59. Image: © popyconcept - Fotolia.com
  60. Image: © Stuart Miles - Fotolia.com
  61. Image: © spinetta - Fotolia.com
  62. CLE Link to slide deck will be emailed Any questions we didn’t have time to answer will be emailed Image: © Ivelin Radkov - Fotolia.com
  63. Image: © Sasajo - Fotolia.com