ValuAdder Business Valuation Blog

The tradition continues - our customers ask and ValuAdder delivers: the latest release of our business valuation software gives you all the tools you need to value a business or professional practice.

What is new in ValuAdder 4.0.6

We have increased the coverage in ValuAdder business valuation Rules of Thumb to 410 industries. Every Rule of Thumb is statistically derived from latest private business sales.

Valuing a business based on market comps

You can determine the value of a business based on direct comparison to similar privately owned businesses that have sold recently. ValuAdder gives you immediate results providing the business market value range, average and median values based on your selection of the business type and just a few financial inputs.

Here are the latest industry additions:

• Control and measurement instruments manufacturing businesses.
• Data processing, item capture services.
• Document production and distribution companies.
• Document storage, archival and destruction companies.
• Electric services, power generation and transmission service companies.
• Radio, video, data communication equipment manufacturing firms.
• Systems integration services, hardware and software resellers.
• Toy and game manufacturers.

That’s in addition to the other 402 business types across all major industry sectors!

The financial recasting worksheets have been further streamlined to save you time and effort. You can start your business appraisal from the company’s usual financial statement data such as Income Statements and Balance Sheet. The worksheets give you a step-by-step way to prepare for your business valuation:

1. Determine the company’s true earning power.
2. Assess business risk.
3. Prepare all the inputs you need for your business valuation calculations.

Avoiding costly mistakes in your business appraisal

The adjustments you make on the worksheets are key to accurate business appraisal. Using business valuation formulas on incorrect financial inputs is the biggest cause of mistakes in business valuation.

One example is the use of valuation multiples:

Small business owners typically seek to minimize taxable income. Hence, business cash flow is a far more accurate measure of business earning power than net income. Discretionary cash flow or net cash flow are most commonly used in business appraisals.

You need to make several critical adjustments, known as addbacks, to get from the net income to the discretionary cash flow.

For many small businesses, seller’s disretionary cash flow can be several times the net income. If you apply a valuation multiple based on cash flow to net income, the business valuation error can be on the order of 300 - 500% or more!

Another mistake is using discount and capitalization rates that have nothing to do with your business risk profile. ValuAdder lets you assess your company-specific risk - an essential requirement for accurate business valuation.

Business Valuation using ValuAdder

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 own a car wash business or looking to buy one, here is a piece of good news: car washes are one of the most profitable sectors of the service industry with above average profits. These businesses are known to generate steady income due to the necessary and recurring nature of the service they offer.

While changes in car designs and energy alternatives may have lasting effect on many auto service businesses, the car wash will continue to provide the same basic service. This, of course, means that you can expect the revenues in the car wash sector to continue growing steadily.

The car wash service is a typical small business industry: classified under SIC code 7542, there are over 29,500 car washes in the US alone. The industry generates a very respectable $4.4 billion each year in gross sales and employs just under 138,000 people. Yet the average car wash is quite small, employing a staff of 5 and having the annual gross revenues around $200,000.

Established, profitable car wash operations are very marketable - the up-front investment of starting a new business can easily tip $2 million! Buying an existing business offers a very attractive alternative of immediate cash flow and steady business growth prospects.

Car wash businesses come in several types: the self-service, conveyor and the highly automated in-bay. The more profitable establishments tend to offer additional value-added services which include on-site detail services, gift and coffee shops, and periodicals for sale.

Business valuation methods for car washes

Given that car washes sell often, there are plenty of market comparables data to do your business valuation. Typical pricing multiples used are selling price to gross annual revenues, discretionary cash flow or EBITDA. The price to cash flow multiples are especially well suited for valuing a business with the above average profitability.

Valuing a Business using Market Comps

Well-established car washes may have considerable goodwill. In these cases, the Capitalized Excess Earnings method is an excellent choice. In addition to showing the value of the business and its tangible assets, you can use this well-known business valuation method to demonstrate the value of business goodwill.

For younger car washes or businesses in a rapid expansion mode, the Discounted Cash Flow business valuation method may be more appropriate. You can demonstrate the value of a business to partners and outside investors based directly on your earnings forecast and risk assessment.

ValuAdder raises the bar once again on business valuation software with the latest V4.0 edition.

Now in its 4th generation, ValuAdder has helped thousands of small business people and professional advisors world-wide to determine the value of their businesses and structure successful business acquisitions.

The secret of success? Listening to our customer needs, using the best technology available, passing the savings directly to our customers, and offering world-class support!

With ValuAdder 4.0 we follow this tradition to give business people anywhere the valuation software system that has stood the test of time:

1. Market-derived valuation rules of thumb for over 400 industries. Virtually all business types are now covered!
2. Latest discount and capitalization rates to ensure that your business appraisals are accurate and up-to-date.
3. Worksheets streamlined for quick financial statement recasting and forecasts - an important requirement for any business valuation.
4. Flexible selection of any business valuation method under the standard income, market and asset approaches. You can do what-if scenarios, side-by-side comparisons and custom business valuation method selections with a mouse click.
5. Updated Learning and Info Center covering all aspects of valuing a business and structuring a business sale or purchase.
6. A number of performance enhancements which take advantage of the cutting-edge Java 6 technology features.

The result? Quite simply, the business valuation system that is more accurate, flexible, secure, easy to use and reliable than anything available on the market.

Business market value comps for over 400 industries

For market comps, we have focused on additions in the hottest industries of today. The industry coverage in the ValuAdder Rules of Thumb module is now the impressive 402! You can estimate your business fair market value in just about any industry - by direct comparison to similar business sales.

Here are the latest additions:

Health care services

• Intermediate care facility
• Nursing and personal healthcare services
• Specialty hospitals
• A number of medical laboratory and test facilities

Energy sector and green industry businesses

• Energy management and conservation services 
• Oil and gas production, development and exploration
• Oil and gas well drilling services
• Recycled wood products manufacturing
• Recycled paper products manufacturer
• Metal products recycling
• Metal distributors and service centers

Personal and business finance, insurance

• Personal and consumer credit companies
• Short term business credit, factoring services
• Business credit and underwriting services
• Life insurance carriers
• Accident and health insurance
• Hospital and medical service insurance plans
• Fire, marine and casualty insurance

Information technology services

• Computer facilities management service
• Computer maintenance and repair
• Computer peripherals and software products value-added resellers

Manufacturing industry

• Electronic components manufacturing.

Retail industry

• Radio, television and electronics store.

Educational services

• Private schools, including pre-school, elementary and secondary education levels
• College level and professional training schools
• Junior / associate degree colleges

There are also extensive updates for the restaurant, construction, finance and real estate industries.

If you plan to buy or sell an online business, you will be glad to know that the market for privately owned Web based companies is alive and well.

In addition to many individual business buyers, Internet businesses often attract larger players - corporate buyers and private equity investors. Such business buyers can pay a premium for a growing Internet business in order to realize certain synergies with their business investment portfolio.

In this active market, it is important to measure the value of an Internet business you have created or plan to buy. So what is your business worth?

Internet business market value - directly from the market place

The answer is simple: with all the market bustle, there is plenty of recent data on Internet business sales. You can use these business sale comparables to come up with a quick yet defensible estimate of what your Web based business is worth.

The latest release of ValuAdder business valuation software, V3.5.10, makes this task a breeze. You can calculate the market value range, average and median business values using the valuation formula multiples for a number of Internet business types.

Internet business valuation formula multiples available in ValuAdder V3.5.10:

• Online publishers
• Business and consumer e-tail
• Search engine marketing agencies, Pay-per-Click and SEO
• Directory, information and subscription service sites
• Online auctions
• Advertising sites
• Internet entertainment sites
• Website design firms
• Hosting providers and IT services
• Software and technology development firms
• Internet telephony, VoIP
• And many more!

Business valuation for a click-and-mortar operation

If you run an off-line business as well as a website, you can use the market-based rules of thumb to determine the value of a business across 375 industries - including service firms, restaurants, auto repair shops, retail, manufacturing, building contractors, and professional practices, to name a few.

Internet business valuation - 3 ways

Of course, no Internet business valuation is complete without income and asset-based valuation calculations. With ValuAdder, you can cross-check your business market value results using the well-known Discounted Cash Flow, Multiple of Discretionary Earnings and Capitalized Excess Earnings methods to calculate the value of business goodwill and total business value.

Putting together your business sale or purchase

Need to structure the terms of a business sale or purchase? You will find the Deal Check calculation very handy.

If you are an Internet business buyer, ensuring that the terms of your offer make financial sense is key to avoid costly mistakes.

If you are a Web based business owner, structuring effective terms for the business sale keeps you from leaving money on the table.

If you are in the process of buying or selling a business, these questions should sound familiar:

• What is my business worth?
• What price can I sell or buy a business for?
• How are the deals structured in my industry?
• How long does it take to sell a business?

The answers, of course, are provided by the market place - where businesses like yours actually sell.

To help you make critical business acquisition decisions easier and on target, ValuAdder offers the Business Market Value Reports.

Compiled on request, each Report includes up-to-the-minute information on private business sales that are similar to yours. The Report includes actual business selling prices, key business performance parameters, deal terms, days on market and more.

We have recently updated the Business Market Value Report format to make it even more powerful:

1. You can now estimate your business market value based on Book Value of Equity. That’s in addition to over 40 valuation multiples based on gross and net sales, gross profit, net income, EBITDA, EBIT, discretionary cash flow, and assets.
2. You can use standard liquidity tests such as the quick and current ratios to make your market comparisons more meaningful.
3. You can compare your company age and staff size to stats of sold businesses.
4. You can estimate the value and duration of your non-compete agreements directly from the private business sale data.

Of course, the Report still includes the business selling price estimates, and key deal terms such as amount of buyer down payment, seller financing, asking to selling price ratios, as well as the time it takes to sell a business.

Business market value data you can trust

We make sure you have business market value information that is timely, accurate and credible.

The Report includes references to where the data came from: the private business sale data sources used by professional appraisers, business brokers and venture capitalists.

You will find this information essential to estimate the business market value, set a compelling asking or offer price, structure the deal terms, and plan your business for sale marketing campaign.

To see more, take a look at the sample Business Market Value Report.

AICPA has finally done it! After years of work, the latest Statement on Standards for Valuation Services (SSVS No. 1) goes into effect on January 1, 2008.

While upholding the substance of the earlier USPAP business valuation and reporting standards, SSVS No.1 introduces several new definitions and requirements for professionally prepared business appraisals.

Business valuation engagements

Professional business appraisers and their clients can choose between two main types of business valuation engagements:

1. Calculation engagement
2. Valuation engagement

The key difference between the two is in the choice of business valuation approaches and methods.

In a calculation engagement, the business appraiser and client agree up front what business valuation methods will be used to calculate business value.

Under the valuation engagement guidelines, the business appraiser is responsible for choosing all the business valuation methods. The appraiser then uses the results from the different methods to come up with the business value - either as one number or a value range.

See an example of how to do this in Step 5 of the business valuation process: reaching the business value conclusion.

Business valuation report formats

Under SSVS No. 1, the different types of business valuation engagements can be reported in a number of formats.

Calculation engagements are reported in a calculation report. Valuation engagements can be reported in either of the two formats:

• Detailed report
• Summary report

Both types of business valuations can be reported in an oral report format.

Here are the key elements that should appear in a Detailed Report:

• Letter to the client which accompanies the report
• Table of report contents
• Introductory sections
• Information sources used in business value analysis
• Non-financial information analysis affecting the business being valued
• Financial statement analysis and adjustment for business valuation
• Business valuation approaches and methods considered and selected
• Reconciliation of the different business valuation method results to conclude business value
• Representation and professional qualifications of the business appraiser
• Supporting information such as appendices and exhibits

With ValuAdder V3.5 business valuation software you have complete flexibility to choose from a number of standard business valuation methods under all three approaches: Asset, Market, and Income.

This enables you to address your specific business valuation needs and meet either the SSVS No. 1 calculation or valuation engagement requirements.

The Business Valuation Report Builder V2.1 includes important language expected of SSVS No. 1 compliant business appraisal reports.

And you can use the power and flexibility of a fully editable Microsoft® Office Word template to complete your business valuation reports in record time!

If you need to present your business valuation results in a professional appraisal report format, you will find that the newly released Business Valuation Report Builder V2.0™ is the tool for the job.

Professional business valuation reports that comply with the USPAP standards 

Starting with a 40+ page report template in the familiar Microsoft® Office Word format, the Report Builder™ takes you through the process of preparing a standards-compliant business appraisal report in record time. And you can create your reports on a Windows or Mac computer.

Here is how the Report Builder™ simplifies creation of your business valuation reports:

• Gives you the power and flexibility of a fully editable Microsoft Office Word template format.
• Covers the essential reporting requirements through compliance with the industry-leading USPAP Standard 10 guidelines.
• Saves you time and makes you more productive. You can create report snippets that can be reused time and again.
• Gives you the freedom to choose the business valuation tools you want. You can use your own spreadsheets - or a set of ValuAdder standard business valuation methods.

The Business Valuation Report Builder™ comes with a powerful feature set to make your business valuation reports stand out:

• Report Creator which generates an unlimited number of fully customizable business valuation report templates.
• User’s Guide which shows you how to create professional business appraisal reports quickly and effectively.
• Extensive Comments which offer helpful suggestions as you complete your report.
• Automatic Fill-In of important details such as the business and client names, business valuation date, and business appraiser credentials.

Prepare professional business valuation reports - and save a bundle! 

If you don’t have Microsoft® Office, the Business Valuation Report Builder™ can also save you money. You can prepare your business valuation reports using the freely available OpenOffice.org office productivity suite!

Another ValuAdder milestone completed - we have just released ValuAdder V3.5.7.

In addition to a number of performance enhancements, we have focused on the key step in your business valuation: financial statement reconstruction.

In valuing a business, the historic financial statements are a starting point. To get an accurate business valuation, you need to adjust your company financials, the process business appraisers call financial statement reconstruction.

To help you get through this important step, ValuAdder provides 3 worksheets, each used for the various business valuation methods:

• Multiple of discretionary earnings
• Business valuation rules of thumb
• Discounted cash flow
• Capitalized excess earnings

The worksheets enable you to start with your company’s Income Statements and Balance Sheet, then consider and make the appropriate adjustments that represent the business earning power.

The worksheets are organized in a sequence of numbered pages, giving you the step-by-step instructions, pointing to the areas requiring your input, and automatically generating the values you can use to calculate your business valuation results with ValuAdder.

We have updated the Report format to give you more time-critical info to price a small business for sale or purchase. Each of the Valuation Data tables now features an Observations section explaining how you can use the data to put together a successful deal.

Here is just a brief summary of what will be included in your report:

• Selling price estimates based on your business revenues, assets, cash flow and profits.
• Deal structure elements used to sell similar businesses: percentage of buyer down payment, seller financing terms.
• How long it takes to sell a business like yours: days on market from actual business sales!

Check out the Report details and take a look at a sample report.

Our latest ValuAdder 3.5.5 business valuation software release now offers you an indispensable resource on all aspects of business valuation and structuring a successful business sale or purchase. A 190-page Business Valuation Handbook combines the key information on how to value a small business and construct a business acquisition that makes sound financial sense.

You can access the Handbook directly in your ValuAdder Help menu. View the document in a PDF reader or print portions of the book to use as a handy reference.

If you prefer a printed-and-bound book on your desktop, we have published the Handbook as a separate product, available here: Printed Business Valuation Handbook.

Our customers asked and we have responded - ValuAdder 3.5 business valuation software now lets you calculate the value of business goodwill directly. Featuring the time-honored Capitalized Excess Earnings business valuation method, ValuAdder Business Goodwill Tab does this important calculation for you.

You will find this very handy in a number of common business valuation situations:

1. When allocating the business purchase price among the business tangible assets and goodwill. This has important tax implications when buying or selling a business.
2. To clearly demonstrate the value of business over and above its tangible asset base.
3. As a reliable cross-check of business value results you obtained from the other business valuation methods.

While knowing the value of business goodwill is important for all business owners, it is especially so for owners of professional practices, consulting businesses and technology-based companies.

Frequently, the value of business goodwill and other intangible assets far exceeds the value of the tangible assets for these firms. Since goodwill may represent a large part of the total business value, its accurate measurement is essential.

ValuAdder comes complete with the Business Goodwill Tab to calculate your business goodwill, worksheets to develop all the inputs you need, and a Tutorial which explains how this business valuation method works. You will find some useful insights there, including how to handle the situations with negative goodwill!

Another major milestone for ValuAdder business valuation tools!

We have updated ValuAdder to run on the latest Windows Vista and Max OS X Tiger computer systems. If you enjoy the Windows Aero or Mac OS X 10.4 visual effects, you will appreciate the slick look and feel of ValuAdder 3.5. And you can use your computer system display preferences to easily customize how ValuAdder looks on your computer.

Of course, ValuAdder runs on many other versions of Windows and Mac OS, including Windows XP and Mac OS X 10.3 Panther. And because ValuAdder 3.5 is built on the industry-leading Java platform, you can install the product on the computer system of your choice!

We have also added some new features to make ValuAdder even more powerful and easy to use:

• Rules of Thumb for 351 industries to estimate your business fair market value.
• Enhanced deal structuring tools to put together a solid business acquisition deal.
• Easy customization of ValuAdder to your specific valuation needs.
• Greatly expanded Learning and Information Center.