This document discusses the importance of understanding the value of a business. It notes that while business owners often only consider valuation when selling, other needs like estate planning, financing, and succession planning also require understanding value. The document outlines factors that influence business value like growth, industry, and competition. It then summarizes common valuation methods like asset, market, and income approaches. Finally, it stresses the importance of planning exit strategies in advance through techniques like buy-sell agreements, mergers/acquisitions, and tax strategies.

1. WHAT IS THE VALUE
OF YOUR BUSINESS
© Vladimir Hulpach, P.O.Box 17005, Fountain Hills, AZ 85269, USA

2. Do You Want to Know What Is Your
Business Net Worth?
Common approach:
I will be concerned about my business net worth when
there is a “need” for a valuation.

3. Needs for a valuation do come up!
Common Examples:
 Sale of a business
 Mergers and acquisitions
 Estate and gifting
 Succession planning
 Insurance
 Financing

4. Why and When Should You Care
Responsive Approach
Previous examples =
mostly forced by circumstances.
Proactive Approach
Allows to fix a price or set
methods to determine business
value in planning for
foreseeable events:
• Buy/Sell Agreements
• Family Business
Succession
• Insurance
• Stock Options
• Trigger Value
Are we able to predict
situations dictating a need
for business valuation?

5. Can We Influence the Business Value?
Negligible Influence - Examples:
• Inflated salaries
• Non-recurring expenses
• Non-related assets
Essential Influence - Examples:
• Growth rate
• State of the industry
• Position among competition
Using the Momentum:
• Global and local economic
outlook
• State of capital markets
• State of the industry
• Current competitive position of
the Business
Understanding the
Factors
Timing of the Valuation

6. Introduction into the Valuation Process
Illustration – A value of a traded security
Analogy of valuation techniques – elements missing:
 Free marketability
 Adequate comparables
Valuation by a definition (mostly “FMV”)
Valuation vs. Appraisal
Use of Third Party Appraisals (art, collectibles, antiques, jewelry, real estate,
machinery and equipment)

7. Valuation Methods
Valuation by Purpose:
 Sale, purchase or transfer of a business
 Mergers and acquisitions
 Shareholders transactions, buy/sell agreements
 Employee benefit plans, stock options
 Valuation of insurance
 Estate taxation and estate planning
 Gift taxation, charitable contributions
 Loan applications, collateral valuations
 Solvency/insolvency opinions
 Purchase price allocation (FAS 141R)
 Goodwill impairment (FAS 142)
 Bankruptcy determinations (liquidation value, NOL)
 Marital dissolution

8. Valuation Methods (continued)
Standard of Value:
 Fair Market Value
 Fair Value
 Synergistic Value
Premise of Value:
 Book Value
 Going Concern Value
 Liquidation Value
 Replacement Value
Effects of Purpose of Value on Conclusion of Value:
Obvious interest of the owner (gifting, sale)
×
FMV, 3rd party expert opinion, IRS scrutiny

9. Some Myths about Valuation
„Valuation of a private business should be only be performed when the
business is ready to be sold or a lender requires it as part of its due
diligence process.“
If this is the first-time valuation, usually:
 Resulting Value < Optimum Value
 Planning issues and taxation benefits have not been addressed
Benefits of critical planning:
 Business
 Tax
 Ownership
Examples:
 Value of Loan Collateral
 Estate tax
 Buy/Sell Agreements secured by Life Insurance

10. Some Myths about Valuation - continued
„Businesses in my industry usually sell for two times annual revenue,
why should I pay someone to elaborately value my business?“
Quick estimates using various multiples (Revenue Multiple, Net Income/Profit Multiple...):
What do the Multiples tell us?
Source: Pratt´s Stats
2012 Real Net Revenue Multiples
Where exactly does a firm within the industry, with $2,000,000 in revenues fit?
What your business is worth today generally depends on:
 How much cash it generates today
 Expected growth in cash in the foreseeable future
 The return buyers require on their investment in your business
Industry Year Min. Max. Average Median
Auto – Parts 2012 0,93 8,30 2,91 3,18

11. Some Myths about Valuation - continued
„My business loses money, so it cannot be worth much.“
Fact: Most private businesses appear to lose money.
Financial statements reflect an array of discretionary and non-standard items.
Examples:
 Salaries
 Accelerated depreciation
 Value of intangible assets
 Non-business assets
 Need to normalize financial statements
(duty of a valuation analyst)
NORMALIZED FINANCIAL STATEMENTS
+
OTHER ELEMENTS OF THE VALUATION PROCESS
↓
REALISTIC VALUE

12. The Valuation Process
Methodology by NACVA (National Association of Certified Valuators and Analysts):
1. Value Estimate Assignment
• Description of Assignment
• Purpose and Function of Valuation
• Standard, Premise and Level of Value
• Methods of Valuation
• Value Estimate Key Assumptions
• Limiting Conditions
• Executive Summary
2. Company Overview
• History and Background
• Capital Structure
• Management and Personnel
• Facilities and Equipment
• Products and Services
• Other
3. Economic Conditions
• Global and/or US Economic Outlook
• Regional and Local Economic Conditions

13. The Valuation Process (continued)
4. Comparative Analysis
• Industry Overview
• Company’s Position in the Industry
• Qualitative Factors Affecting the Value (SWOT)
5. Financial Analysis
• Financial Information
• Balance Sheet Analysis
• Income Statements Analysis
• Cash Flow Analysis
• Ratio Analysis
• Normalizing Adjustments
6. Valuation Methods and Findings
• Asset Approach
• Market Approach
• Income Approach
7. Valuation Adjustments
• Control Premium or Minority Discount
• Lack of Marketability/Liquidity Discount
• Other Premiums and/or Discounts
8. Reconciliation and Conclusion of Value

14. The Value of Intangibles
Intangible assets may represent an important part of your business’s value!
Your business = typically a collection of assets of different nature:
Tangible Assets:
 Cash & Cash Equivalents
 Receivables
 Inventory
 Investments
 Property, Plant and Equipment
Intangible Assets:
 Patents
 Trademarks
 Copyrights
 Brand Recognition
 Workforce in Place
 Customer Lists
 Goodwill

15. The Value of Intangibles (continued)
What is Goodwill?
Typically goodwill = a residuum: When a business is sold for a price
higher than Fair Market Value, goodwill represents the difference.
„Goodwill is a proclamation of the new management about how it will
use the acquired assets in a way impossible for the previous owner.“
Synergy example: A hotel chain buys an independent golf course.
Acquired Goodwill (on the books)
x
Hidden Goodwill (built-in)
Not amortized but tested for impairment
Different approaches to valuation of Intellectual Property:
 Income vs. cost methods (patents)
 Comparative methods (effective royalty rate)
 Substitution methods (workforce value)
 Projection - distribution simulation

16. Planning an Exit Strategy
The benefits of understanding
 Factors determining the value → maximize the value
 Structure of the value → asset separation, tax strategies
Advantages of a family business in Exit Strategy Planning!
Sale of Business
Preparation for a sale of a business:
 Learn about comparable transactions
 Recognize the market conditions
 Optimalize the business operations
 Normalize financials and/or adjust practices
 Invest in the company?
 Estimate tax implications
 Select the sales and marketing tools

17. Planning an Exit Strategy (continued)
Mergers and Acquisitions
Pros and Cons
Loans and Private Equity
The Wall Street Journal - April 2014: ”Direct lending takes off in Europe“
Interest of global investors – private equity funds - examples
Succession Planning
 Buy/Sell agreements
 Third party purchase options
 ESOPs
 Use of insurance
 Quick estimates of value for succession planning
Tax Strategies
 Gifting
 Charity
 Other tax deductions
Keep track of your business’ s net worth!