Some difficulties in valuing small business (Part 1 of 2)
Oct 01, 2014 | Industry News
The main difficulty in valuing small business is the record keeping of the small business owner. Since he or she is the proverbial “chief cook and bottle washer,” keeping the financial records is down at the bottom of the list in running the business. In many cases, the owner keeps the business checkbook, bills and receipts and then dumps them all on an accountant’s or bookkeeper’s desk periodically. From these “records,”... Continue Reading →
Three Basic Factors of Earnings
Two businesses for sale could report the same numeric value for “earnings” and yet be far from equal. Three factors of earnings are listed below that tell more about the earnings than just the number.
1. Quality of earnings
Quality of earnings measures whether the earnings are padded with a lot of “add backs” or one-time events, such as a sale of real estate, resulting in an earnings figure which does not accurately... Continue Reading →
What is the Value of Your Business? It All Depends.
The initial response to the question in the title really should be: “Why do you want to know the value of your business?” This response is not intended to be flippant, but is a question that really needs to be answered.
Does an owner need to know for estate purposes?
Does the bank want to know for lending purposes?
Is the owner entertaining bringing in a partner or partners?
Is the owner thinking of selling?
Is a divorce or... Continue Reading →
Creating Value in Privately Held Companies
“As shocking as it may sound, I believe that most owners of middle market private companies do not really know the value of their company and what it takes to create greater value in their company … Oh sure, the owner tracks sales and earnings on a regular basis, but there is much more to creating company value than just sales and earnings” Russ Robb, Editor, M&A Today
Creating value in the... Continue Reading →
What Would Your Business Sell For?
There is the old anecdote about the immigrant who opened his own business in the United States. Like many small business owners, he had his own bookkeeping system. He kept his accounts payable in a cigar box on the left side of his cash register, his daily receipts – cash and credit card receipts – in the cash register, and his invoices and paid bills in a cigar box on the right side of his cash register.
When his youngest son... Continue Reading →
Checklist for Valuation
1. Start with the business
– Value Drivers: Size, growth rate, management, niche, history
– Value Detractors: Customer concentration
Poor financials
Outdated M&E
Few assets
Lack of agreements with employees, customers, suppliers
Poor exit possibilities
Small market
Potential technology changes
Product or service very price sensitive
2. Financial analysis: Market Value – comparables... Continue Reading →
Simplifying the Valuation
“There are many reasons for valuing an entity, and those circumstances can lead to different outcomes…For instance, a business’s value for sale on a going-concern basis will differ from its value for liquidation purposes. It similarly makes a difference if the valuation is for an orderly liquidation as opposed to a forced one. For example, the value of a company for estate-tax purposes (fair market value) likely... Continue Reading →
What Is a Business Worth?
Many courts and the Internal Revenue Service have defined fair market value as: “The amount at which property would exchange between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having a reasonable knowledge of relevant facts.” You may have to read this several times to get the gist and depth of this definition.
The problem with this definition is that the conditions cited rarely... Continue Reading →