One of the key business valuation techniques is comparing your business to recent sales of similar companies. This relies on the valuation multiples derived from business selling prices and financial performance measures of the companies sold. Usually, these multiples are based on the business earnings or asset values, e.g. revenues, discretionary cash flow, EBIT or EBITDA, total business assets and the like.

So far so good. If your industry sector has plenty of recent business sales that are captured in public or private sources of data, you can get your market comps to do the comparison. The more business sales the better since you can develop a decent set of valuation multiples that are statistically reliable.

But what if your business is unique enough so the comparison is difficult or impossible because similar companies do not sell often or such sales go unreported?

Here are a couple of suggestions you can use:

• Call similar businesses you know. Business owners may be aware of the likely prices.
• Contact business brokers that specialize in your industry. Often they keep their own data and may be willing to advise you.
• Check with an industry group. They may help you directly or refer you to a business consultant with the knowledge of the market place for your type of business.
• Contact a vendor that sells equipment or supplies to companies like yours.

If none of these sources have the answer you are looking for, then the market comparison may not be a good approach to value your company. You can still come up with a good estimate of your business value by using the various methods based on the asset and income approaches. These types of valuations do not call for a market comparison. Instead, your valuation is based on the direct assessment of your company value.

Businesses may have a wide range of intangible assets at their disposal. One important type of such assets that tend to increase in value over time is databases and subscription lists.

This is especially so if the lists are assembled one item at a time. Consider a customer database that grows as the business adds new customers. A customer list of 100 is worth less that 1,000; while a database with 10,000 customers is worth even more. Compiling the list of 10,000 customers is going to cost more than 1,000 or even 8,000. The reason is that such lists grow one item at a time and the costs of expanding the list are incurred at every step.

Valuing such databases is likely to be done two ways. One way is to estimate the cost of putting the list together as of the current date. On the other hand, you can assess future sales and profits less the costs of compiling the list. In either case the result is the database value to the business.

One important point is that such databases or lists have the potential to grow in value. As the number of customers in the list grows there is the potential for even greater list value.

So if the database grows continuously, assigning a value to it may give you a wrong answer. If the database is worth $10,000 now or $1 per customer in the list, then even a 30 year useful life would result in some $333 being written off each year.

If the database doubles in size in 3 years, its value may well be $20,000. Instead, the depreciation shows that the database list is worth $9,000 due to depreciation.

The depreciation may not reflect what is really going on. As the database grows, its value should grow. Instead, the depreciation makes this intangible asset look less valuable each year.

While some intangible assets may have a limited useful life and decline in value, others, as the example above shows, do just the opposite.

Under the accounting standards published by the Financial Accounting Standards Board (FASB) two deal with the way business goodwill is handled: SFAS 141 and SFAS 142.

Business goodwill is put on the company’s books if management acquires another firm. Under the SFAS 141 and 142 goodwill is tested each year for impairment. This impairment occurs when the fair value of the business overall is less than the sum of the fair values of all its assets.

Let’s say that a company carries a book value of $1,000,000 in assets. This includes $100,000 in business goodwill from an earlier acquisition. The goodwill is unchanged until there is an impairment.

If the company’s value this year is $1,500,000; it is clearly above the total asset value and there is no goodwill impairment.

But if the market conditions change, the value of the business may drop down to, say, $900,000. This just covers the asset value. To bring the value of the company in line with its assets it needs to take a write down of business goodwill of $100,000. It is charged to the business earnings in the year and could easily wipe out the entire profit.

This is the case even though this goodwill impairment is a non-cash charge that has nothing to do with how well the company operations did in the year. Because the profits may not look good, the company’s perceived value may go down even more!

When discussing the company’s valuation with potential investors it would be wise to point out that business goodwill impairment may be responsible for a slide in profits. A closer look at business operations may reveal that the company’s earning power is unaffected.

These days business people do their work on any computing platform they choose – be it a laptop, desktop or a mobile device. For serious business valuation work the two types of systems that come up most often in our experience are Windows and Mac computers and laptops.

Often, your work may be done on a number of computers. For example, you may gather your business data and load your ValuAdder financial recasting worksheets in the office on your Windows desktop computer. Then continue with the business valuation analysis using a laptop at home.

With ValuAdder you have the flexibility of doing just that. Under a single user license, you can install your software on both the office desktop and home office laptop computers. You can share the data between the two ValuAdder installations using your network, mobile storage devices or email.

This flexibility comes in handy if you need to share your business valuation results with partners or other parties located outside your office. For example, a business broker may prepare a business appraisal for a client and take the work to the negotiating table on a site visit.

This way, the results can be discussed with the parties to a business sale transaction during the most appropriate time. You can point out your findings as well as make last minute adjustments as you gather inputs from the parties.

One of the key business tangible assets, inventory is well understood by both business people and appraisers. Businesses determine the value of inventory to close the books on a regular basis. Inventory is a unique type of asset in that it tends to turn over rather quickly flowing to the cost of goods sold on the company’s income statement.

Accountants are used to checking the inventory amounts and determining its value. The fair market value standard is typical when valuing inventory.

Business buyers often prefer high inventory values because they can allocate a greater proportion of the business purchase price to this tangible asset. As the inventory is sold the amount flows directly to the cost of sales reducing the business taxable income.

Another motivation for high inventory values is that less of the business purchase price needs to be assigned to goodwill. Many business owners do not like to carry large amounts of goodwill on the books as investors tend to be rather unimpressed with such financials.

Remember that using the fair market value standard when valuing inventory may help avoid undervaluing this important business asset.

To answer this question requires a judgment call. Each company needs to make a decision whether to disclose the values of its intangibles depending on its set of circumstances.

Under the Generally Accepted Accounting Principles (GAAP) the firms should make available all information that helps investors and creditors understand and forecast future cash flows – the essential input into business valuation.

So the question really is: will the knowledge of intangible asset values help you project the future cash flows with greater accuracy.

Creditors, shareholders and potential investors are likely to be interested in any intangible assets the company owns and especially those that are undervalued. This becomes even more important if the intangible can be separated and sold or licensed to others. Consider a brand name or a valuable trademark that can generate considerable additional revenue stream from royalty payments.

Trained and assembled workforce may not be severable like a brand name, but its value to the success of the company is pretty obvious. Many investors would like to know just how valuable the key staff members are especially if a the company is to be sold and some of the employees may require incentives to be retained.

Note that, just like the business value itself, values of intangible assets can go up and down. Business owners and investors may well want to know how the values of such intangibles are affected by the company’s overall performance.

If you want to attract investor interest in a growing company with considerable internally developed intangible assets such as intellectual property, disclosing this information in a clear and convincing way is a good thing.

Much of intangible asset valuation is part art and part science. So a big picture view of what the key intangibles are worth is the first step toward making the disclosure. The idea is to inform the interested parties about valuable possessions that the company can bring to bear in order to grow and increase in value.

In the US the Internal Revenue Service has laid out the expectations for what the tax authorities look for in business valuations. Here is the list:

• The nature of the business and its history
• The book value of the company stock and its financial condition
• The dividend paying ability of the firm
• The presence of goodwill and other intangible assets
• Sales of company stock, sizes of stock blocks to be valued
• Market price of stock of companies in the same line of business whose stock trades freely on the open market

Most professional business appraisers pay close attention to the above requirements when preparing their valuations. The points are given some attention in the business valuation report that follows.

For privately owned companies, some of the points are less relevant, e.g. the dividend paying capacity. This is because private companies like to avoid the taxation burden that paying dividends brings.

In this case, the tax authorities are typically interested in the business cash flow outlook. So a realistic earnings forecast is useful both for your income-based business valuation as well as meeting the level of transparency expected of a well thought out business appraisal.

Every business valuation relies upon a set of assumptions about how the economic environment will look some time in the future. Once the assumptions are made, the business appraiser can make forecasts for the business being valued.

If you take a look at a typical business valuation report, there is usually a section outlining the economic conditions. This discussion is useful to the extent that it helps the reader understand how the business will be affected by the overall economy in the future.

This is because business valuation is about the expectation of what might happen at some future point. The business earnings forecast can then be made and used as a key input into your business valuation analysis.

You will make the economic conditions section in your business appraisal report more useful if it focuses on what the future economic prospects are likely to be. The remainder of the business valuation should tie these expectations with the business value analysis and calculations. This way the reader can carefully review the economic outlook discussion, spot the assumptions made and see how the appraisal ties it all together with the business value results.

You may have heard this: business value fluctuates as time goes on. Fair enough, but the question you may ask is what factors best capture this change? Here is our short list:

• Discount rate
• Capitalation rate
• Valuation multiples

The reason these numbers are in a constant state of flux is that the marketplace conditions vary quite a bit. Most of this variation happens because the investors reassess the risks and change their investment strategy accordingly.

If the market is edgy, business people tend to take a conservative stance for a while and see how things turn out. This usually means pulling resources from risky investments and parking them somewhere safe.

The discount rate captures a company’s risk, so it is not surprising that this factor will change as risk changes. If you take a closer look at what goes into the discount rate build-up formula, you will see how this may happen.

For instance, risk free returns may change as the government makes policy changes to its policy. The equities market as a whole may be seen as more or less risky due to major political or economic changes underway. Specific industries may enter a period of expansion and lower risk. Smaller companies may face bright prospects for growth and attract a lot of investor interest, lowering the required rates of return.

On a smaller scale, the company being valued may well be going through some changes that can affect how its riskiness is seen by investors.

The capitalization rate, being the difference between the discount rate and earnings growth, is also easily affected over time. Just imagine the typical swings in business earnings that may change the cap rate at any time. Since business value grows with lower cap rates, healthy earnings growth prospects tend to increase the company’s value.

Valuation multiples are similar. Since they are derived from comparable company sales, you are looking at how other investors see the current business risk when buying businesses of a certain type. This is useful because you can assess the business risk for you company by checking what other investors think about similar companies at the moment.

You might think: if all business appraisers follow the standards such as USPAP and AICPA SSVS how come the results differ? The main reason is that clients influence the outcome of professional business valuations. Business people have a reason for business appraisals and an idea of their own of what the company is worth.

The reason may affect what a client expects to see in a business appraisal. A buyer would prefer a lower number than a business seller. Just about all business valuations are used in some kind of negotiation – between business partners, in tax situations, financial reporting, raising funds or acquisitions.

It is likely that each party will have their own business appraisal and the results will differ based on the clients’ expectations. In theory it is possible to come up with an impartial business valuation. However, neither party is going to be satisfied with the figure.

In most real world situations the appraiser is acting as the client’s advocate. He or she is expected to support the client’s position by gathering the supporting evidence. In this sense the business appraiser is objective but not really independent.