ValuAdder Business Valuation Blog

Whether you are valuing a business by yourself or engage a professional business appraiser, a business appraisal report is a typical work product you get.

Such a report does more than summarize the business valuation results - it clearly defines what business ownership interests are being valued. Importantly, it also shows the key assumptions and judgement calls made by the business appraiser.

Now, as a busy business person you may be tempted just to glance at the business valuation result, decide if it is reasonable, then file the report.

Nothing wrong with that, but there is more to be gained from a well-prepared business appraisal report. If you plan to share your business appraisal with others, it is likely they will have questions about your conclusions. On occasion, they may even challenge your business valuation results.

The reasons any business appraisal can be questioned

Business appraisal deals with the business’s future economic prospects. This necessarily requires that you make a number of assumptions. And these assumptions mean that you, or the business valuation expert you hire, make educated judgement calls in order to reach the business value conclusion.

Needless to say, the reader of your business appraisal report may disagree with some of the assumptions contained in the report.

• Are the business sale comparables really comparative to your business? 
• How realistic is your projection of the future business income?
• Have all the elements been considered when assessing the company risk?
• Why were these business valuation methods, and not others, chosen to calculate business value?

Typical business appraisal accuracy

Even the most thorough business appraisal will depend for its accuracy on some “leaps of faith” that will affect the final business valuation outcome. So two equally skilled business appraisers will likely come up with different valuation results.

How different? It is not unusual to see a difference of around 20% - 25% between professionally done business appraisals of the same company. In fact, an increasingly common practice in business appraisals is to report the result as a range of business values.

Business appraisal results are useful - if you can defend your assumptions

So if you meet with a healthy dose of skepticism when sharing your business appraisal results with others, you will appreciate why your business appraisal report contains more than just a number.

To use your business appraisal results effectively, spend a bit of time to understand and be prepared to defend the assumptions that drive your business value conclusions.

What’s in a Business Appraisal Report?

If you need reliable industry valuation multiples for your business - look no further. ValuAdder Business Market Value Reports give you over 40 valuation multiples derived from the latest private business sales in your industry.

40 valuation multiples to assess your business market value

Custom-compiled to your specifications, each Business Market Value Report features over 40 valuation multiples derived from the sales of similar private businesses. Your Report gives you a comprehensive assessment of what the business is worth on the market based on the key financial parameters:

• Gross revenues and net sales.
• Gross profit.
• Net income.
• EBIT and EBITDA.
• Discretionary cash flow.
• Business asset base, including inventory levels.
• Book value of sold businesses.

See how the successful acquisition deals are put together

If you are planning to sell your business or make an offer to buy one, your Report offers strategic answers to these key questions:

• What were the selling prices for businesses like yours? 
• How are the successful business acquisitions structured?
• How do the asking prices compare to the actual business selling prices?
• How long does it take to sell a business in your industry?

Actual private business sales reported by business brokers

These business sales have been reported across more than 700 industries by professional business brokers closing successful deals. In addition, a number of transactions represent private business acquisitions by public companies.

Back your critical decisions by data from the two renowned databases trusted by the business appraisal professionals and brokers everywhere.

See sample Business Market Value Report!

If you are looking to have a business appraised hiring an appraiser is one of the ways to do it. As with any professional engagement the question of costs comes up rather quickly.

Not surprisingly, professionally prepared appraisals don’t come cheap; the average hourly rates these days are around $300. A well-done business appraisal takes about 20 hours or more. Do the math, and the price tag runs to $6,000 and up.

That’s not including any extra consulting time to present the business appraisal to partners, other professionals, prospective buyers, sellers or investors.

Instant business appraisals - too good to be true

What about those “instant” business appraisals for a few hundred dollars? Let the buyer beware: professional appraisal takes time. And time costs money. With a “minimum wage” business appraisal you quite literally get what you pay for.

So, can you get an accurate, defensible business appraisal and save?

Yes indeed! Given the right tools, you can do your business appraisal yourself - and save quite a bundle.

Most of the business appraisal cost is in the time the appraiser takes to do the work. And most of the time is spent understanding the business being valued.

Obviously, you can use your own knowledge of the business to cut down on time and costs. But what about the business valuation tools and knowledge?

A complete business valuation system

That’s where ValuAdder comes in. To make sure you can do your business appraisal yourself, ValuAdder gives you both the knowledge and tools to do it:

1. Complete business valuation software system. You can use the same valuation methods the professional appraisers use to calculate your business value.
2. A Learning and Information Center and 190-page Business Valuation Handbook. There is plenty of expert advice and guidance to get you through your business appraisal.

There is a Business Valuation Guide to introduce you to the fundamentals of business appraisal. Detailed Tutorials on valuation methods and helpful How-To Sections with examples. Every term is defined and explained in the Glossary.

To save you both time and money, ValuAdder is designed to simplify and speed up your business appraisal:

• Do split-second business market value comparisons in any of 400 industries.
• Determine business value based on its earnings and risk.
• Calculate business goodwill and total business value.
• Structure a successful business sale or purchase.
• Get tips on each input - right as you enter your numbers.
• Pick and choose the tools you want with a mouse click.
• Generate reports and share your business valuation results in the format you want: PDF, spreadsheet, Web page.

Latest word in valuation software reliability and accuracy

You may ask: how is all this possible? The short answer: state-of-the art technology and sound software engineering.

ValuAdder relies on the leading edge Java technology to give you a superior business valuation system - at a fraction of competitors’ costs:

Do your business valuation on any computer of your choice, in any currency

You can run ValuAdder on any Windows, Mac OS, Linux or Unix computer. ValuAdder naturally adapts to your computer preferences and settings - including multi-currency calculations.

Open Source technology saves you money

Java and Open Source lets us cut down dramatically on our development costs - and we pass the savings directly to you!

State of the art in security, reliability and accuracy

This technology also makes your ValuAdder an extremely stable, reliable and accurate business valuation software system. 

Less support costs for us, better price for you!

Valuing a Business based on Income, Assets, and Market Comps

One of the greatest strengths of ValuAdder business valuation software is that it evolves continuously to respond to our customer needs. Our latest product release, ValuAdder V4.0.5 is no exception - by popular demand we have added the following new features:

1. Business valuation Rules of Thumb Tab now provides the standard SIC and NAICS industry classification codes for all 402 industries.
2. Multiple of Discretionary Earnings business valuation result reports the overall earnings multiplier, in addition to the 14 valuation factors.
3. Financial recasting worksheets now let you determine the company-specific risk premium from 10 key risk factors.

As before, ValuAdder Rules of Thumb let you locate the industry of interest three ways:

• By name: with all industries arranged in alphabetic order.
• By industry group: so you can see all related business types for quick comparison.
• By direct search: typing just part of the business description instantly produces all matches. You can quickly narrow down your choices by providing a more specific business description, e.g. specialty retail instead of retail.

Business market value comparison - quick and accurate

Once you have found the industry to do your market comparison, click on the Info button to see the actual SIC and NAICS industry classification codes. Make sure you are using the right industry for your market comparisons!

Business valuation as multiple of its earnings

Multiple of Discretionary Earnings business valuation automatically creates the earnings multiplier based on your assessment of the business across 14 key financial and operational performance factors.

With ValuAdder V4.0.5 your business valuation result now also displays the earnings multiplier value. This important result is also reported in the ValuAdder Earnings Multiple report. If you are creating a business valuation report, include this important value along with your valuation factors.

Assess company-specific risk for accurate business appraisal

If you are using the famous Discounted Cash Flow method for valuing a business, you will find that the accuracy of your business valuation results depends upon the discount rate you use. One of the most important and challenging parts is how to figure out the company-specific risk.

ValuAdder V4.0.5 worksheets introduce a build-up procedure to determine the company-specific risk.

Now you can estimate this important value easily - by ranking the business accross 10 key risk factors:

• Earnings stability
• Financial leverage risk
• Operating risk factors
• Profitability
• Customer concentration
• Product concentration
• Market concentration
• Competitive position
• Quality of the management
• Skill of employees

The result? Quite simply, the most systematic and accurate way to value your business based on the two essential parameters:

1. Business earnings
2. Business risk profile.

If you are looking at valuing an owner-operator managed small business, then the Multiple of Discretionary Earnings business valuation method should be high on your list of priorities.

One of the best examples of the so-called direct capitalization valuation methods, this method determines the value of a business as a multiple of its discretionary cash flow.

One of the greatest strengths of this well-known business valuation method is an excellent match it provides between the business earnings and a broad range of financial and operational performance factors.

You can get very accurate business valuation results with this method. Equally important, you can see how the business value is affected by the quality of the operation.

Balance sheet inputs that affect business value

For highly accurate results, you also need to provide several financial values from the company’s recast balance sheet.  These include:

1. Net working capital.
2. Non-operating assets.
3. Long-term liabilities.

For the purposes of your business valuation, Net Working Capital is the difference between the business current assets, less inventory; and its current liabilites, less the short-term portion of the long-term debt. Essentially, this represents the liquid capital used by the business owners for short-term financing.

Non-operating assets may include such items as business-owned real estate, excess inventory and underutilized production or distribution capacity. The idea is that the business asset base should be adequate to support its level of earnings. All assets that are not used to generate these earnings are extra - and can become additional and valuable parts of a business acquisition.

If you value a debt-free business, the long-term liabilities are zero. However, if the business uses financial leverage, then your business valuation must factor in these liabilities. The result is the value of business owners’ equity interest in the business.

If you bought or sold a small business before, you may notice that Multiple of Discretionary Earnings method measures the business value on an asset sale basis. In fact, most small business sales are asset transactions.

In these cases, the business assets, less cash and trade receivables, transfer to the buyer. The seller pays off all business liabilities to deliver these assets free and clear. Non-operating assets may be valued separately and included in the deal.

If you are buying a business or selling your business, estimating the business selling price by market comparison is a good idea. Recent business sales in your industry offer an excellent way to develop your asking price or check your offer price and terms.

A number of business pricing multiples to choose from

As we discussed in the Business Valuation using Market Comps post, you have a number of valuation or pricing multiples to do your comparisons. Which ones work best?

How to pick your pricing multiples

The answer depends on your business valuation situation. Your choice of the valuation multiples needs to address these important questions:

1. Which pricing multiples give the most accurate prediction of business market value?
2. Which valuation multiple gives the best estimate of what my business is worth?

In the market, business selling prices are set by the business sellers and buyers. So what do these players use as their basis to determine the business value?

Valuation formula multiples are developed by statistical analysis of the actual business sales. Let’s say that in your industry the Price to Gross Revenue valuation multiples cluster around the average value. In other words, business values determined using such pricing multiples fall within a narrow range.

This means that your business peers tend to rely on the business gross revenues to determine the business selling price. Knowing this, you can use the Price to Gross Revenue valuation multiple to get a good idea of what your business is worth.

Obviously, such pricing trends can differ by industry. ValuAdder market-based Rules of Thumb Pricing Formulas use advanced technology to help you make the most accurate choice of the valuation multiple for your business.

Business valuation multiples - making strategic choices

You can use a number of other business valuation multiples as a strategic choice to demonstrate your business value.

For example, the business may be exceptionally profitable compared to its industry peers. In such a case, you may decide to use the Price to Net Income or EBITDA valuation multiples which will show how profitability translates into superior business market value.

If the business is asset rich, business Price to Tangible Assets or Total Asset base may be a good choice of a pricing multiple.

Alternatively, you can pick the Price to Gross Profit valuation multiples. This may be a good fit if the business shows outstanding operational efficiencies which keep its direct costs low compared to the competition.

Take a peek at ValuAdder Business Market Value Reports to see how a number of business valuation multiples can be used to estimate your business market value.

If you need a bullet-proof way to show what your business is worth, compare it to similar businesses that sold recently. In fact, such business market value comparisons are widely used by business people and professional business appraisers. So much so, that they deserve an official name: Comparative Transaction business valuation method.

Market comps and business fair market value

One of the greatest strengths of valuing a business by the Comparative Transaction method is that it establishes the business fair market value. This is perhaps the best known standard of business value.

Done correctly, such business valuation results are compelling and defensible. Many business people believe that the market ultimately decides what businesses and their assets are worth.

Business valuation mechanics: pricing multiples

To make an apples-to-apples comparison, you can use a number of pricing multiples - ratios which relate the likely business selling price to its financial performance. Examples of commonly used business pricing multiples are:

• Business selling price to discretionary cash flow or net cash flow.
• Business selling price to gross or net revenue.
• Business selling price to net income, EBITDA, EBIT, EBT.
• Price to total assets, tangible assets or business book value.

To make the comparison accurate, you can pick a number of actual business sales in a specific industry. Some questions that come up often:

1. My business generates income from several profit centers. How do I do my business market value comparisons?

2. My business is very specialized. Are there enough similar business sales to compare against?

Business market value comparisons, such as those offered in ValuAdder Business Valuation Rules of Thumb, are organized by industry. If your business is pure play, deriving all or most of its income from one industry, you can make your business value comparison directly against your industry group.

For multiple profit center businesses, you can estimate your business fair market value as follows:

1. Check the business values in each industry group of interest.
2. Assign a weight to the business market value result from each industry in proportion to its revenue contribution to your business.
3. Sum up the results to get a business value estimate for your company.

Valuing a Business with Market Comps

Example

We are looking at a business with $1,000,000 annual sales.

Let’s assume that the business generates 70% of its revenues from retail product sales. The remaining 30% are derived from its client consulting services.

We check comparable business sales using the pricing multiples for retail sales and consulting services. The first comparison uses the $700,000 revenue as the basis and indicates that this part of the business is worth around $550,000.

The second comparison, using the $300,000 revenue basis, shows an additional business value of $250,000.

Combining the two results, we get the business market value estimate of $800,000.

Note that this estimate does not account for the synergies among the business profit centers. That is why it is a good idea to value your business several ways - including the income-based business valuation methods such as Discounted Cash Flow and Multiple of Discretionary Earnings.

Fair market value estimation for specialized businesses

If your business is very specialized, chances are there are not enough comparable business sales. In this case, you can choose a broader industry group to do your business value comparison. 

Standard industrial classification systems, such as SIC and NAICS, are very helpful to locate the relevant industry groups.

Most business people expect that an established business is worth more than its asset base. This extra value is known as business goodwill.

In other words, you can determine your business value as the sum of its assets plus business goodwill.

The accepted way to estimate the value of business goodwill is to capitalize the so-called excess business earnings. You can use the well-known Capitalized Excess Earnings business valuation method, sometimes called the US Treasury method to do the job.

Business value = Assets + Business Goodwill

Once you determine the fair market value of business assets, you can calculate the value of business goodwill as follows:

• Start with business earnings, usually net cash flow.
• Subtract a fair return on business net tangible assets. The difference is the excess business earnings.
• Capitalize the excess earnings to calculate the value of business goodwill.

Business goodwill value: positive or negative?

The value of business goodwill you get from above is positive for most established businesses. Occasionally, a business goodwill result can be negative. What can this mean?

• Business earnings are below the fair return on business assets.
• Some business assets are not fully used to generate income.
• The business is seen as high risk which calls for a high rate of return on business assets.

Handling negative business goodwill

If you get negative business goodwill value, consider these points:

• Make sure you account for all business earnings correctly. See how net cash flow is calculated.
• Identify which assets are either overvalued or not fully used to produce these earnings. Adjust the asset values.
• Revisit your fair rate of return figure. See how to build it up to properly capture your business risk.

One of the benefits of using asset based business valuation methods is that you can see how each business asset and liability contributes to business value. This is very useful for a number of important reasons:

• Estimation of business value for tax purposes. 
• Business purchase price allocation.
• Determination of which business assets are available as part of business sale.

To use the well-known asset accumulation method to value your business, you start with the current balance sheet. You then adjust this cost-basis data, accounting for off-balance sheet items and estimating the fair market values of business assets and liabilities. The difference is business value.

One of the important adjustments is determining the value of business long-term liabilities. A typical example is a commercial bank loan. Business management may have negotiationed the terms of such financing some time in the past. As financial market conditions change, so do the terms of such loans.

So how can the terms of debt financing obtained awhile ago affect what your business is worth today? Let’s take a look at an example.

Example: favorable financing and business value

Suppose that you have a commercial bank loan with $250,000 balance and a 10 year term at an attractive 4.75% fixed annual interest. Under this arrangement your yearly payment, including both principal and interest, is $31,454.32.

If you were to raise this loan today, your bank would charge you around 7.75% interest. This would mean an annual payment of $36,003.19. By financing debt at the lower 4.75% rate, your business saves $4,548.87 each year.

This effectively lowers the present value of the loan. And since your business value is calculated as the difference between the present values of the business assets and its liabilities, such favorably financed debt works to increase your business worth. 

You can account for this business value-enhancing effect of lower cost debt financing as follows:

1. Start with your current annual payment of $31,454.32.
2. Discount this payment stream at the current market rate of 7.75%.
3. Calculate the present value of the debt. This is what the favorably financed loan is worth today.
4. Subtract this amount from the fair market value of business assets.

Using ValuAdder Loan Schedule and Discounted Cash Flow calculations you find that, instead of $250,000, the commercial loan is worth only $213,461.86 today. Other things being equal, this contributes $36,538.14 to your business value.

As the name implies, the income-based business valuation methods consider business earnings when calculating business value.

Importantly, the direct capitalization methods, such as the well-known Multiple of Discretionary Earnings method, use a single number as its earnings input.  Coupled with a matching choice of capitalization rate, which captures business risk, the Multiple of Discretionary Earnings method produces very accurate business valuation results.

A big advantage of this method is that it automatically matches your business earnings and the capitalization rate - a key requirement for accurate business valuation.

Multiple of Discretionary Earnings uses seller’s discretionary cash flow as its earnings basis and lets you specify business risk based on a number of essential financial and operational business performance factors.

So how do you choose the business earnings number? There are several choices to consider:

• Simple average of SDCF taken over several years.
• Weighted average SDCF value.
• Squared weighted average SDCF value.

Your choice depends on which way of calculating business earnings best represents the business income prospects going forward.

For example, if the earnings don’t change much year over year, a simple average of SDCF over the last 3 - 5 years is a good choice.

On the other hand, the weighted average and, to a greater extent, squared weighted average schemes put stronger emphasis on the most recent business financial performance. These choices are best if your business earnings changed significantly in the last few years.

A custom weighting scheme may be good if you want to handle unusual years - those showing business earnings that are either much higher or lower than normal.

Example

Let’s say that you need to value a business with the following seller’s discretionary cash flow history over the last 3 years:

1. Year 1 (earliest): $100,000
2. Year 2: $135,000
3. Year 3: (most recent): $159,000

Based on your analysis, the business shows average performance across all 14 financial and operational performance areas considered by the Multiple of Discretionary Earnings business valuation method. Given this, you decide that, on a scale of 0 - 4.0,  the business gets a rank of 2.5 in each area.

Business net working capital is $50,000; and it has no long-term debt. Business leases its premises and, in your judgement, carries no excess assets.

Scenario 1: Business valuation result using the simple average to calculate the earnings basis

In this case, your business earnings are just the sum of the 3 annual values divided by 3:

($100,000 + $135,000 + $159,000) / 3 = $131,333.

Using this value along with the $50,000 for the business net working capital and setting all performance weights to 2.5 produces the following business valuation results:

Business Value = $378,333.

Scenario 2: Business valuation result using the squared weighted average to calculate the earnings basis

This time, you decide that business earnings in the more recent past are better indicators of what the business will likely earn in the future. You select the weights of 1, 2 and 3, square them, and calculate your earnings input as follows:

($100,000 x 1 + $135,000 x 4 + $159,000 x 9) / 14 = $147,929.

Your business value calculation now produces a different result:

Business Value = $419,823.

This is around 11% higher than the result you got with the simple average earnings in Scenario 1 above. No surprises here: your earnings input is higher.

What this means is that you expect the business earnings to be in line with the higher values seen in the more recent years. This business growth upside is correctly captured by your Multiple of Discretionary Earnings business valuation.

Each business is unique in the way it creates value. When you need to measure what your business is worth, it is good practice to choose a number of proven business valuation methods.

For example, you may select a method under each of the major business valuation approaches: Income, Market, and Asset. This way, you can ensure that your business valuation results are on a solid foundation.

ValuAdder is designed as a flexible toolkit that makes your business valuations quick, accurate and comprehensive. You can pick the business valuation methods with a mouse click and create valuation scenarios that best match your needs.

And you can do all your business valuation calculations in any currency. ValuAdder automatically adapts to your computer settings and displays the currency that fits your location. You can change the currency at any time. For example, on a Windows computer do the following:

1. Click on the Start menu in the lower left corner of your display.
2. Click on Control Panel and select Regional and Language Options.
3. Now choose your regional format, such as English (United States).

Start ValuAdder to do your business valuation calculations in your regional currency and number format. What’s more, your business valuation reports also use the currency of your choice.

Finding your business value by market comparison

You probably noticed that ValuAdder features a number of market-derived Rules of Thumb. The Rules give you a very effective way to estimate your business fair market value using the well-known Comparative Transaction Method.

In plain words: you determine the business value by comparison with similar businesses that have actually sold. All you need to do is select your business type and provide a few key business financial performance inputs. ValuAdder does a number of calculations to give you the business value range, average and median values.

Locate your business type 3 ways: 1. By Name 2. In Industry Group 3. By Direct Search

With over 350 major industries to choose from you may wonder what it takes to find the right industry for your comparison. ValuAdder engineers thought of this as well - and came up with several handy ways to simplify your work:

• View Rules listed by Name.
• View Rules organized by Industry Group.
• Use the search engine to quickly find the Rule you need.

To see all available business types in alphabetic order, click on the By Name button and scroll to the business type you want.

To look up your business type by Industry Group, click on the By Industry button, then expand the Group view to see all related business types.

For a very quick lookup, use the built-in Search engine: just start typing the business description you are intested in. ValuAdder displays all matching business types immediately.

Now make your selection and specify your key financials such as the business cash flow, revenue, inventory or tangible assets. ValuAdder instantly displays the business value range, average and median values.

You will appreciate the time savings if you need to do a number of market comparisons: when looking for a business to buy or doing a number of what-if valuation scenarios.

Payback period is the time it takes to recover your original investment. If you are buying a small business, that’s your down payment money.

You can use ValuAdder Deal Check tool to factor in your payback period.

Here’s how:

1. Your purchase price and terms 

Enter the purchase price and terms you have in mind. Next, specify the compensation you need for yourself. Don’t forget to enter the “capital expenses” needed to keep the business running smoothly. 

2. Return on down payment 

Now, let’s say you want to get your down payment back within 4 years after the business purchase. Enter 25% into the “Return on Downpayment” input on the Deal Check Tab. This tells ValuAdder that you want to recover your downpayment in exactly 4 years after you close the deal.

3. Does the business throw off enough cash flow? 

Click on the Calculate button to see the cash flow required from the business.

If the actual business cash flow falls short, you can consider a few changes:

• Negotiate a lower purchase price. This, of course, reduces the down payment and cash flow required from the business.
• Lower the down payment amount. You can recover a smaller investment more quickly. Watch the debt service as you use more of “other people’s money”.
• Increase the term of the seller or bank loans. Debt service has a major impact on the business cash flow. Generally, the longer the term, the less cash flow is needed to service it.

Caution: You and your business must be paid! 

Don’t reduce the amount of capital expenses, working capital or your compensation level. You will need to buy new assets and replace old ones as they wear out. And you must pay yourself to meet your own expenses.

Keep the ValuAdder Autocalculate^TM on - it will save you a lot of time as you fine-tune your business purchase terms.

Designed on the leading-edge Java-6 technology, ValuAdder business valuation software is packed with features to simplify and speed up your business valuation.

One of these powerful features is ValuAdder Autocalculate^TM. With Autocalculate^TM on, ValuAdder responds to your inputs by instantly calculating your business valuation results. Refining your business valuation assumptions is a snap especially when coupled with the quick incremental adjustments using the up and down arrows provided on each ValuAdder input.

Here is how you can activate Autocalculate^TM:

1. Run ValuAdder.
2. Click on the Tools menu.
3. Toggle the Autocalculate^TM on. A checkmark indicates that Autocalculate^TM is active.

You will find Autocalculate^TM a real time saver in many business valuation situations, including:

1. What-if scenario analysis.
2. When reviewing a number of business valuation situations with your partners or professional advisors.
3. When developing the terms of a business purchase offer.
4. During negotiations over the terms of a business purchase offer or counter-offer.

One of the greatest strengths of ValuAdder is its flexibility. You will notice that ValuAdder offers you a number of well-known business valuation and deal structuring tools. With all the tools and business valuation methods available to you, you can make the choices that best fit your particular business valuation, business sale or purchase situation.

We discuss the strengths and weaknesses of the various business valuation methods in our Business Valuation Guide. Once you have selected your methods, you can set up your ValuAdder to use them in a just a few key strokes. Here is how:

1. Create a new ValuAdder window by clicking on the File menu and choosing New.
2. Select the valuation methods you want from the Start Tab.
3. Create a Tab for each method you choose by clicking on the Create button.

You can rename your business valuation tools using the Tab menu to make your choices easy to remember. For example, if you are working on a business purchase offer and decide to use the Deal Check tool to structure your offer terms, you can rename the Tab to something like My Offer Terms.

Grouping all your tools in a separate ValuAdder window is an excellent way to organize your work. For example, you can keep all your method selections, your assumptions and valuation calculations together when valuing a specific business. And you can save all your work in one step and then restore it later by using the Save and Open commands in the ValuAdder File menu.

As you know, business valuation depends on a number of key assumptions. Most importantly, your income forecasts for the business influence your valuation results.

Your business plan may include a number of such forecasts. Typically, business people have a set of income and expense projections. Because there is no guarantee how the business will perform in the future, business owners make several projections that reflect possible outcomes. A best case forecast may indicate how the business will do under ideal conditions. If the business conditions deteriorate, a worst case forecast may be a closer fit. The objective here is to be prepared for such situations and prevent problems before they occur.

A standard way to value a business is to use income-based business valuation methods, such as the Discounted Cash Flow or Multiple of Discretionary Earnings. These methods rely on the income projections as their key input. Hence, their business value results will differ depending on which income forecast you use.

To see how your business value changes with each projection, you can use ValuAdder scenario analysis.

Here is how:

1. Make your income and expense projections for each scenario, using the ValuAdder financial recasting worksheets.
2. Select a business valuation method you wish to use, such as the Discounted Cash Flow.
3. Create a Discounted Cash Flow Tab in ValuAdder for each scenario, e.g. Best Case, Worst Case, Most Likely Case.
4. Use your income stream forecasts to calculate the business value for each scenario.

Now you can easily see how your business value changes based on each income forecast. Don’t forget to review the discount rate for each forecast scenario. If the business risk associated with each projection is different, your discount rates for each should reflect this.