Archives for July 2014

The Nuts and Bolts of Valuing a Business

In our last article we discussed just how important it is to disclose the motive for obtaining a business valuation.  Valuations may be required for estate planning, due to divorce or partnership dispute, or for a number of other reasons. In most cases, however, when a business owner comes to me and asks me about the "value" of their business- what they really want to know is  "what do you think I can sell it for?" I wish the answer to that question involved a formula like "Multiply the number of hours you have put into this business by 1,000 and the amount of capital you invested by 2.  For every family event you missed to take care of business, add a million dollars.  Apply a multiple of 10 for every day you didn't quit when the going got tough, and instead toughed-it-out.  That's what your business is worth." Like I said, I wish that was the formula.  Unfortunately, it's not. The "Fair Market Value" of a business is: “The price at which the property would change hands … [Read more...]

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 reflect the true earning power of the company's operations. It is not unusual for companies to have “some” non-recurring expenses every year, whether for a new roof on the plant, a hefty lawsuit, a write-down of inventory, etc. Beware of the business appraiser that restructures the earnings without “any” allowances for extraordinary items. 2. Sustainability of earnings after the acquisition The key question a buyer often considers is whether he or she is acquiring a company at the apex of its business cycle or if the earnings will continue to grow at the previous rate. 3. … [Read more...]

What is the Value of Your Business?

The answer to that question really is: “Why do you want to know?” Now, I realize that may sound flippant, but without the answer it's impossible to give an accurate  response. 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 partnership dispute occurring? Is a valuation needed for a buy-sell agreement? These are just a few of the reasons why knowing the value of the business may be important. Valuing a business can be dependent on why there is a need to do so in the first place, because there are almost as many different definitions of  a valuation as there are reasons for obtaining one. For example, in a divorce or partnership breakup, each side has a vested interest in the value of the business. If the husband is the owner, he wants as low a value as possible, while his spouse wants the highest value. … [Read more...]