This document discusses business valuation and provides an overview of the valuation process. It begins by explaining that business valuation involves giving an opinion on the value of a business's ownership interest based on the assets and liabilities. The valuation process involves analyzing internal company information, industry and economic factors, and using the asset, income, and market approaches to valuation. It then provides more details on each valuation approach and the steps involved before reconciling the different values into a final conclusion. The document also provides considerations for different types of businesses, like manufacturing, and ways for business owners to maximize their value.

1. o What is My Business Worth?
o The Valuation Process
o Asset Approach
o Income Approach
o Market Approach
o Maximize Your Value
o Manufacturing Specific
BUSINESS VALUATION
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2. Question: What is my Business
Worth?
• Answer: What do you mean by “business?”
o Hint: There is no right or wrong answer to this question!
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3. What Do You Mean By
“Business?”
• Does it include or exclude these assets?
o Cash
o Receivables
o Real Estate
o A company car
o Life insurance policies
• Does it include or exclude these liabilities?
o Accounts payable
o BANK DEBT
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4. Are Buyer and Seller Talking
About the Same Thing?
• Buyer and Seller can agree on a “price,” but that doesn’t
mean they are on the same page!
o #1 – Buyer wants to buy assets of the company for $7 million
o #2 – Seller wants to sell stock for $7 million (which includes $5 million
of bank debt)
• Both “prices” are $7 million, but the asset price is $7 million in
#1 vs. $12 million in #2—That’s $5 million off (40%)!
o Assets = Equity (Stock) + Liabilities
o Asset Price = Cash Paid for Stock + Liabilities Assumed
o $7 million in stock + $5 million in bank debt = $12 million in assets
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5. Company “Equity”
1. Cash
2. Current Assets (AR, inventory)
• Prepaid insurance?
3. Current Liabilities (AP, accruals)
4. Property and Equipment
• Real estate?
5. Intangibles and Goodwill
• Trained and assembled workforce
• Customer relationships
• Backlog of work
• Trade name
6. Interest Bearing Debt
#1 & #6 - not part of the deal in an asset purchase
#2 & #3 – usually part of the deal - defined as “noncash working capital”
#4 & #5 – usually part of the deal
#5 is the real thing we are trying to value
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6. The Takeaway?
• Involve the accountants and clarify what assets and liabilities
you are buying or selling
• Be sure Buyer and Seller are talking about the same assets
and/or liabilities
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7. What is a Business Valuation?
• Giving an opinion as to the value of an ownership interest
(usually shares of stock) of a business
o Generally, all assets and liabilities of a company
(theoretical equity value)
• Fair Market Value – consider both sides – willing buyer and
seller
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8. The Business Valuation Process
• Internal Company Information
• Economic and Industry Analysis
• Valuation Approaches
o Asset
o Income
o Market
• Value Conclusion
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9. The Business Valuation Process:
Internal Company Information
• Review of past five years’ financials statements
• Interviews with management
• General investigation of major assets, liabilities and
business operations
• Identifying strengths and weaknesses
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10. The Business Valuation Process:
Economic and Industry Analysis
• Primary purpose: Help quantify risks associated with the
Company’s operations
• Identify key external factors (interest rates, inflation,
competition, etc.) that may have a direct effect on the
Company’s value
• Compare the Company to its industry (Benchmarking)
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11. The Business Valuation Process:
Valuation Approach – Asset
• Value the Company’s assets and liabilities at fair
market value (FMV)
o Appraisals are usually obtained (real estate, equipment, etc.)
o FMV of liabilities typically equals book value
• Evaluated as if the Company liquidated in an orderly
fashion (Can set a floor for value)
• Not necessarily what Seller would realize in aftertax
sale proceeds
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12. Asset Approach
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FMV Fair Market
Book Value Adjustments Value
Cash 608,740$ -$ 608,740$
Accounts receivable 667,510 - 667,510
Inventories 314,482 - 314,482
Other 120,585 - 120,585
Total Current Assets 1,711,317 - 1,711,317
Equipment 483,289 716,711 1,200,000
Real estate 610,408 139,592 750,000
Other assets (life insurance) - - -
Total Assets 2,805,014 856,303 3,661,317
Note payable 620,000 - 620,000
Accounts payable 41,009 - 41,009
Accrued liabilities 171,221 - 171,221
Total Current Liabilities 832,230 - 832,230
Deferred income taxes - 600,000 600,000
Total Liabilities 832,230 600,000 1,432,230
Rounding 20,913
Net Book Value 1,972,784$ 256,303$
Net Asset Value of Business 2,250,000$
Liabilities
Assets

13. The Business Valuation Process:
Valuation Approach – Income
• Value today = future cash flow discounted at the
opportunity cost of capital
• Economic vs. Accounting Income:
Normalization Adjustments
o Officer’s salary
o Rent
o Charitable contributions
o Extraordinary items
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14. Income Approach
• Just because profits are reported correctly in
accordance with accounting standards does not indicate
it reflects economic reality
• If I am a buyer, what cash flow will be available for me
to pay back the debt incurred on the purchase?
• Future cash flow is discounted back to the present at a
determined discount rate
• Discount rate reflects the risk of the future cash flow
• Example: Picking up a quarter that is two feet away
from you vs. a $100 bill that is across a busy city street.
Risk! www.hbcpas.com
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15. Historical Normalized Income
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2013 2012 2011 2010 2009
Net income (loss) 351,917$ 923,783$ 817,908$ 648,082$ 196,580$
Income tax 5,000 12,500 14,000 12,200 3,253
Pre-tax income 356,917 936,283 831,908 660,282 199,833
Normalization adjustments
Actual owners' compensation 354,000 418,000 318,000 280,000 14,845
Normalized owners' compensation (150,000) (150,000) (150,000) (150,000) (150,000)
Normalized rent (75,000) (75,000) (75,000) (75,000) (75,000)
Officers' life insurance - (15,845) (20,220) 60,146 (42,903)
Interest income (3,662) (7,543) (3,886) (2,074) (5,628)
Gain on sale of equipment - (22,671) (14,303) (993) -
Gain on deferred comp - (48,699) - - -
Contributions 52,634 96,232 70,890 57,500 16,357
Interest expense 57,400 59,520 35,000 28,488 -
Depreciation 158,374 215,555 265,935 277,973 284,752
Rounding (663) 4,168 1,676 3,678 (2,256)
Normalized EBITDA 750,000$ 1,410,000$ 1,260,000$ 1,140,000$ 240,000$
Normalized EBIT 615,000$ 1,215,000$ 1,015,000$ 885,000$ (15,000)$
Note: Normalized EBIT has $25K in building depreciation added back

16. Income Approach
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EBITDA (next year's) 1,000,000$
Less: interest expense (35,000)
Less: depreciation expense (200,000)
Pretax Income 765,000
Income taxes (40%) (306,000)
Net Income 459,000
Add: depreciation expense 200,000
Less: required capital expenditures (200,000)
Changes in working capital/interest bearing debt -
Net Cash Flow to Capitalize (next year's) 459,000
Capitalization Rate (Appendix E) 17.0%
Operating Equity Value 2,700,000
Non-Operating Assets:
Excess cash 608,000
Real estate 750,000
Life insurance -
Rounding (8,000)
Total Equity Value of Company 4,050,000$

17. The Business Valuation Process:
Valuation Approach – Market
• The stock market can provide objective evidence
of value
• Search for similar companies and determine valuation
multiples
• Common Multiples:
o Revenues
o Net income – aka “P/E multiple”
o EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization)
o EBIT
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18. Market Approach
• Private broker reporting databases of nonpublic
companies
• Difficult to see how truly comparable they are – but can
prove useful in certain industries
• Key is to know what is included in the “price” reported
by the broker (possibility of errors)
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19. Market Approach
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Company Chosen Formula
Operating Measure Amount Multiple Value
EBIT 800,000$ x 5.0 = 4,000,000$
Add: excess cash 608,000
Less: interest bearing debt (620,000)
Add: life insurance -
Add: real estate 750,000
Rounding (38,000)
Total Equity Value of Company 4,700,000$

20. The Business Valuation Process:
Value Conclusion
• Reconcile the different approaches
• Sanity checks/Rules of thumb
• Decide on value
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21. Value Conclusion
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Weighted
Method Equity Value Weighting Value
Asset Approach 2,250,000$ 0% -$
Income Approach 4,050,000 75% 3,037,500$
Market Approach 4,700,000 25% 1,175,000
100% 4,212,500
Rounding (12,500)
Total Equity Value 4,200,000$

22. Equity Value Reconciliation
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Cash 608,740$
Working Capital (Non-Cash, Debt Free) 890,347
Real Estate 750,000
Equipment 1,200,000
Intangibles 1,970,913
Total Assets 5,420,000$
Interest Bearing Debt (620,000)
Deferred Income Taxes (600,000)
Equity 4,200,000$

23. Maximize Your Business Value
• Clean up as much personal expenses as you can
o Be sure you are running it like a business
• Look to sell or distribute non-operating assets (considering
income tax ramifications). Excess cash – not protected from
creditors/lawsuits.
• Know/Tell your story
o Why would a buyer be interested in you? Processes/structure has
value.
o Have good answers to tough questions (customer concentration).
• All key management positions filled by someone other than
the owner. Succession plan in place.
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24. Working Capital
• Working capital is critically important in the operation of a
business and often implicit in determining a company’s value
• Example: 2 businesses are both generating $500,000 in net
profit in the manufacturing industry
• Company A needs $1 million of noncash working capital to operate
• Company B needs $1.5 million of noncash working capital to operate
• Why would this be?
• Which Company is more attractive?
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25. Working Capital
• Manage your business to minimize your investment in these
noncash assets
o Ultimately, this may increase your sales price
• KEY POINT: If you can show your business needs less cash
to operate, Buyer will be willing to pay you more
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26. Manufacturing
• Generally higher multiples observed vs. other industries
• How capital intensive is your business? Future capital
expenditures needed to support future projections.
• Working capital
• AR – customer payment terms. The shorter the payment period, the less cash tied up
in the business and the higher the return on assets.
• Inventory – inventory turnover.
• Real estate – does it have separate value from business?
• Proprietary products with dealer or customer network vs.
something closer to a job shop which work is rebid every few
years
• Production capabilities
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27. Manufacturing Multiples:
Manufacturing vs. Other Industries
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28. Manufacturing Multiples:
Public vs. Private Buyers
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29. Questions?
Glen E. Birnbaum
CPA, CVA, ABV, AM
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