Curiosity aside, business appraisals are almost always triggered by a pressing need. Business people generally are interested in what the business is worth for these reasons:

• Business sale transaction, including sale of the entire company or offering a block of stock for sale.
• The need to raise additional debt or equity capital.
• Gift or estate taxes.
• Partner buy-in or buyout of a departing partner’s ownership interest.
• Litigation such as divorce or shareholder disputes.

In just about all of these situations business appraisal is a zero sum game: one side usually wants a higher result while the other is interested in lower business valuation.

Valuation of a business for sale

If you are a business buyer, you would naturally seek to lower the purchase price, hence the need for conservative valuation. On the other hand, if you plan to sell your business you would be most likely interested in getting the highest price possible for the company.

This adversarial relationship between parties to a business appraisal brings up an interesting question: is there a way to strike a balance between the conflicting interests of the parties involved?

Business fair market value is revealed in the market place

Since it is harder to argue against obvious facts, business people are likely to reach a sensible compromise provided there is sufficient evidence as to what the business assets are really worth. When in doubt, you can refer to the market place. If there are enough transactions involving similar businesses, the prices paid by others serve as a good starting point in your own negotiation.

Sale comparables and business value

The idea is that comparable business assets should sell for about the same price. In the consumer market this is very clearly the case. Consider the prices paid by a dealer for a used auto you offer as a trade-in for a new car. While your objectives and those of the dealer are directly opposed to each other, to make a deal you are likely going to agree on a price that fits somewhere in the range other car owners have accepted.

For a given car brand and condition, there are usually plenty of sales data to go by. So comparable selling prices tend to help you keep your negotiation relatively simple and straightforward.

The situation is similar with business assets. Those that can be easily substituted and sell often tend to have a pretty well defined price range in the market. But if your company owns some highly specialized assets, the situation could be more difficult.

Business valuation: beyond sale comps

The same applies to the business itself. If comparison is hard to make, arguments as to the business fair market value are likely. That is one reason a well considered, comprehensive business valuation is very important. You can demonstrate what the business is worth by using a number of methods, not just the market comparisons.

The more unique the business, the more such considerations as the earnings prospects, unique business value drivers and industry growth potential define its true value.

If you do your work on an Apple Mac computer, you may have heard the big news – the latest Mac OS X Lion version of the operating system has been released on July 20, 2011. Packing over 250 new features that enhance your productivity, Mac Lion is sure to impress the most demanding users.

Do you need to conduct a business valuation on your Mac? Then you will be pleased to know that all ValuAdder business valuation software tools are fully supported and available for Mac OS X Lion.

The powerful new features of Mac Lion, such as the much improved multi-touch functionality, make it even easier to use ValuAdder in your business appraisal projects.

Mission Control can be used to easily switch between various valuation scenarios you create with ValuAdder software – each appearing in its own window. Use the gestures on your Mac Lion touch pad to instantly see all the valuation scenarios you have created.

Or quickly scroll through the Learning and Information Center content using the two-finger scroll gesture. Come back to your appraisal report with a single swipe. Resume your valuation analysis work right where you left off. And the new Auto Save feature in Lion makes sure your scenarios are always saved and available whenever you need them.

Don’t forget the Versions feature that lets you create multiple revisions of the same valuation scenario. You can either create new ValuAdder valuation scenarios, update the current valuation calculation with inputs from a previously saved one, or start a new analysis – all in just a few moments.

ValuAdder scenario files are in the industry-standard XML format. Need to communicate with your colleagues or clients? Use AirDrop to share your business valuation results wirelessly during reviews or negotiations.

Any business valuation method in ValuAdder has a report attached to it. You can create the report in a PDF format, print it or export your analysis as a spreadsheet file. Then email it instantly.

Need to prepare a professional business valuation report? With ValuAdder Report Builder you have quite a number of choices for creating a standards-compliant high quality report. Just create a pre-configured report template and open it for editing in a number of office productivity apps available on Mac Lion, including Office Mac, iWork or the Open Source LibreOffice productivity suite.

If you need to get a top notch business appraisal, consider using a number of different business valuation methods. This multi-method approach to business valuation is standard in professionally prepared appraisals.

The reason is that each method sheds a different light on business value. Hence, seeing the results from a number of methods gives you a well rounded picture of what the business is worth.

One way to handle your valuation is to apply every available method. In practice though, you may decide to choose some valuation methods over others. A specific choice of valuation methods can be more suitable for your situation and significantly reduce the complexity of your business appraisal.

Special business valuation case: the cash cow company

One special case is the so-called cash cow company. These businesses are steady earners that generate consistent returns for their owners despite changes in the economic conditions, competitive pressures and even ownership transitions.

Here are some examples of cash cow companies:

• Established providers of niche products and services to a number of corporate or government customers.
• Firms enjoying long-term contracts with their customers. Examples are contractors to national governments such as the US Federal agencies.
• Companies in a highly protected market with barriers established by unique technology, regulatory requirements or high initial capital investment needs.
• Businesses that have established themselves as institutions in their market. This tends to result in stable recurring earnings from a large number of loyal customers.

Valuation methods used for cash cow businesses

Here are some method suggestions that you can apply to valuation of a steady earner company:

• Direct capitalization valuation methods
• Market comparison to recently sold businesses
• Asset based valuation methods that measure business goodwill

Capitalization methods such as the Multiple of Discretionary Earnings technique are especially well suited for appraisals of these businesses. The methods reply upon a single measure of business earnings to estimate what the business is worth. This works because it is relatively straightforward to predict the earnings of the cash cow business based on its historic performance.

Predictable income stream prospects make cash cow companies highly desirable acquisition targets. As a result there are usually plenty of comparable business sales. You can use valuation multiples derived from such transactions to estimate your business value with considerable accuracy.

Recurrent earnings that characterize cash cow businesses usually point to a loyal customer base. Firms with strong customer following tend to build highly valuable business goodwill. You can use the Capitalized Excess Earnings method to measure the goodwill as well as the total business enterprise value.

ValuAdder engineering and marketing experts have teamed together to hit a major milestone right on schedule – the release of our latest business valuation software – ValuAdder V5.5.

Completely reviewed, updated and current for 2011, ValuAdder V5.5 gives you a powerful, easy-to-use yet comprehensive business valuation system. The entire product has been fine-tuned to help you create expert business valuations to fit your needs – and the current market conditions.

Critical updates to ValuAdder in 2011

As market conditions change, so does business value. For this year, we have introduced a number of critical updates to make sure your valuations truly stand out:

• Discount and capitalization rates data
• All industry valuation multiples
• Discounts for lack of marketability (DLOM) and minority discounts

Now you can ensure that every business appraisal you create is accurate, defensible and relevant this year!

New additions to ValuAdder V5.5 in 2011

Plus, we have worked hard to add a number of useful features to the ValuAdder business valuation tools. Here are the top ones:

Market Comps industry coverage increased to 425 key industry sectors

In 2011 we have added a number of key industry sectors for your market-based business appraisals.

These include the biotechnology and health sciences companies, a completely revised software industry group with the business and consumer software application and security software sectors, as well as the diversified food products manufacturers.

Valuation multiples across all 425 industry sectors have been fully revised and updated to reflect the changing market conditions for 2011.

All this information is fully integrated into your ValuAdder product to help you avoid costly database subscription fees!

Company size risk premia ranges increased up to $500 million in market capitalization

In 2011 we have added five distinct size risk premia ranges to help you calculate the discount and cap rates precisely for your company.

You can now create highly accurate business appraisals for any private company – from the smallest businesses to mid-market industry leaders with market capitalization up to $500 million!

DLOM and minority discounts

ValuAdder worksheets now feature the discounts for lack of marketability (DLOM) and minority discount data tables.

You can use this essential information when valuing partner’s ownership interests for buy-sell agreements, partner buy-out and more. DLOM is applicable whenever you need to adjust your valuation multiples derived from guideline public companies for use in valuation of privately owned businesses.

Discount and cap rate that are up-to-date

You now have access to the most accurate and up-to-date data to calculate your discount and cap rates – critical to the accuracy of your business appraisals.

Updated Learning and Information Center and Handbook

Here you will find full, up-to-date coverage of all aspects of valuing a business and structuring successful transactions. Now there is added coverage on business valuations across a number of important situations including gift and estate taxes, buy-sell agreements, divorce, Employee Stock Ownership Plans (ESOPs) and more.

Consult best practices and suggestions on how to comply with all major business valuation standards including USPAP, AICPA SSVS, and International Valuation Standards (IVS).

Support for latest computer systems

You can install your ValuAdder product on any computer system including Windows 7, Vista, XP and Mac OS X machines. All 32 and 64-bit computer systems are supported!

Enjoy a dramatically lower total cost of ownership as you use the same ValuAdder on any computer of your choice.

If you are valuing a privately owned business, the income-based valuation methods are probably high on your list of tools. To use these methods, such as the Discounted Cash Flow technique, you need to determine the discount and capitalization rates.

Income based business valuation methods and company size

If you take a look at the Build-Up formula for calculating the discount rate, you will notice that the company size risk premium is one element. For a public company this is determined based on its market capitalization. This, of course, requires that you know the company share price and the number of shares outstanding.

How to estimate the size of a privately owned business

Since the market share price is usually not available for a private business, you need a different way to determine its size. One approach is to come up with an estimate of the equity value of the company, then use this to look up the size risk premium for your discount and cap rate calculation.

You can use a number of market-based valuation multiples to do this. For example, use the gross revenue based valuation multiple and multiply the most recent annual business revenues to come up with the business enterprise value of the firm. Subtract total debt from this for a quick equity value estimate.

Now use this figure to look up the appropriate company size risk premium and calculate your discount rate. You can then determine the value of the business with a high level of accuracy and cross check your results against the market-based estimates you developed earlier.

One of the key elements in business valuation of any size is risk assessment. Whether you use the direct capitalization methods, such as the Multiple of Discretionary Earnings technique, or the Discounted Cash Flow method, you need to calculate the capitalization and discount rates to capture that risk.

Business valuation and risk measurement

The Build-Up model is perhaps the most common way to calculate the discount rates. If you take a look at the build-up formula, you will notice that the company size risk premium is one key element. Generally, the smaller the company, the riskier it is and the higher the corresponding size risk premium number.

Small companies are riskier than larger competitors

So how do the company sizes affect their risk in this economy? The spread may be surprising to some. In fact, for small public companies with market capitalization below $50M the size risk premium exceeds 13.9%.

On the other hand, larger mid-market firms with market cap above $500M have a size risk premium falling below 2.84%.

Business value is affected by company size

This means that, for example, the equity discount rate for a $50M company in the construction industry can be around $26.7%. For a $500M counterpart, the discount rate is just 15.65%.

If both companies show minimal earnings growth in 2011, each $1,000,000 in net cash flow of the small company is worth about $3.75M compared to $6.39M for the larger firm, a 71% difference in business value!

Business risk rises quickly for smaller firms

What is interesting is that the size risk premium does not vary smoothly with company size. In fact, the relationship looks more like a hockey stick with a break point somewhere around $150M in market capitalization.

Size matters: Key business value enhancing factors for bigger firms

What makes the larger companies seem so much less risky in the eyes of business people today? Here is our short list:

• Market and product diversification of larger companies reduces their risk.
• Larger companies have succeeded in building very strong balance sheets to manage their financial risk better.
• Bigger businesses have a much easier time attracting capital – both debt and equity.

There is one important attribute all early stage companies have in common: limited earnings track record. Young companies are usually busy trying to figure out the best ways to coordinate their key resources – labor, capital, and entrepreneurial skill to come up with a winning business model.

If you need to value a young company, these considerations should play a key role in your business valuation method selections. You can value any business using one or more of the three key approaches:

• Asset
• Income
• Market

Asset based business valuation for growing firms

As we mentioned above, the early stage companies spend a lot of time optimizing the use of their asset base. They may also be involved in heavy development of key intangible assets such as technology, vendor and customer contracts, and intellectual property.

One important intangible asset you may be aware of is business goodwill. Yet goodwill takes time to build and is typically a large portion of an established firm’s value, not a young start-up.

Hence, the valuation methods under the asset approach are unlikely to help you establish the true economic value of a young growing company.

Market approach and young company appraisal

Market-based valuation methods let you develop business value based on comparison to recent sales of similar businesses. Bear in mind though that the vast majority of private business ownership transfers involve established firms.

Many of the valuation multiples used under the market approach depend on various earnings bases to do the comparison. The typical examples are the company’s EBIT, EBITDA, discretionary cash flow, net income and net cash flow.

There are a number of challenges you may face when using the market valuation methods. A young company may not yet be optimized for profitability. In addition, comparison to well-established firm values makes little sense. Hence, the market-based valuation methods are not the best choice for early stage company valuation either.

Income-based valuation for early stage companies

This leaves us with the methods under the income approach to business valuation. These methods help you determine the value of a business based on the expectation of earnings and risk going forward. This is a good match since young companies have yet to demonstrate their true economic potential and generate an income stream at a risk level acceptable to the owners.

Perhaps the best business valuation method you can pick is the Discounted Cash Flow technique. This powerful method lets you calculate business value directly based on your earnings forecast and risk assessment which is captured by the discount rate.

Given a degree of uncertainty in realizing the future earnings, you may consider running a number of valuation scenarios. The typical format is to repeat the Discounted Cash Flow valuation under the base case, worst case, and best case assumptions. You can then conclude what the company is worth today based on a weighted average of your results. The weights should represent the likelihood of each scenario.

To complement the support for the USPAP and AICPA SSVS No 1 standards, the ValuAdder team has added compliance with the International Valuation Standards (IVS) to our flagship business valuation and reporting solutions, ValuAdder 5 and Report Builder 3.

IVS adoption as the national business valuation standard

Adoption of the IVS as the national valuation standards in Australia, New Zealand, and South Africa as well as IVS incorporation into the national standards in the UK and Ireland has created the need for business valuation tools that help ensure standards compliance in a consistent, flexible yet efficient manner.

Standards compliant valuation system – for professionals and business people

ValuAdder 5 offers a configurable set of recognized methods under the standards-endorsed asset, income and market valuation approaches. All methods enable valuation analysis using the market, investment, fair value and special value bases to calculate the enterprise or equity value of the subject business.

As a result, business analysts, owners and investors can easily create sophisticated multi-method valuations of established firms and start-ups for transactional, litigation, tax, business insurance and financing purposes.

Report Builder 3 features the format and language required to comply with the IVS valuation reporting requirements. Each report created with the Report Builder contains all the elements expected for Standards compliance – and can be easily customized to address any business valuation engagement requirements.

Help with developing standards compliant business appraisals

The integrated ValuAdder Learning and Information Center offers extensive help with developing world-class business valuations along with the compilation of key terms, explanations of concepts, definition of the scope and structure required of any International Valuation Standards-compliant business valuation.

Yet another key milestone for the ValuAdder team – the latest version of the Business Valuation Report Builder tool has been released.

Comply with all major business appraisal standards

Just in time for the upcoming publication of the International Valuation Standards in September 2010, Report Builder V3.0 incorporates a number of important changes aimed at compliance with this important business appraisal standard.

Whether you are a financial analyst or business owner, you can use the Report Builder to create business valuation reports that comply with all three major business appraisal standards:

• International Valuation Standards (IVS).
• Uniform Standards of Professional Appraisal Practice (USPAP), Standard 10.
• AICPA Statement on Standards for Valuation Services (SSVS No. 1).

Business valuation reporting that works world-wide

Ability to simultaneously comply with these appraisal standards means that you can prepare professional valuation reports in just about any jurisdiction. USPAP and AICPA SSVS No. 1 are widely adopted for business appraisals in the US and Canada.

IVS has been adopted as a national business valuation standard in Australia, New Zealand, and South Africa. In many countries the IVS has been made part of the national valuation standard, including the UK and Ireland.

Professional report format – that fits your needs

The Report Builder is designed to save you considerable time and effort when preparing business valuation reports for any situation. Starting with the format, structure and language expected from a professionally crafted appraisal work product, you can quickly edit the initial template to fit the requirements of your specific valuation engagement.

The User’s Guide features extensive explanations of how to create a defensible business valuation report along with the standards guidelines and references. Each report template generated by the Report Builder contains generous comments right at the points in the document that call for your inputs.

You can speed up report preparation by working in the familiar Word or Open Office editor – whether on a Windows or MAC computer system.

Over the recent years we have compiled a wealth of resources on private business valuation and made them freely available to business people and professional advisors like yourself right on this website.

Determining the value of private businesses and professional practices has always been a challenge – both for business people and professionals.

Despite the existence of valuation standards and free data sources of comparable business sales some business people are unaware of these essential resources.

Business appraisal frequently involves judgment calls that are difficult to grasp even for the seasoned analyst. Often the explanation of the terms and methods used in a business appraisal lacks clarity leaving advisors and business people frustrated and confused.

By using the ValuAdder Resource Center you can now gain full understanding of the valuation fundamentals and find the information you need at your own pace. The Resource Center is organized to make this easy and efficient:

Business Valuation Glossary

Here you will find plenty of concise, clear definitions and explanations covering all aspects of business valuation.

Business Valuation Guide

See explanations of the valuation essentials along with examples of using a number of standard methods.

List of Authoritative References

Your will find references to the appraisal standards bodies, sources of business sales data, government resources and professional associations. Helps quickly locate the information you need for valuation engagements, business self-appraisal and effective use of valuation services.

Business Valuation Blog

Take advantage of practical business appraisal examples across a number of industries. There is extensive discussion of valuation techniques and suggestions on best practices that shed the much needed light on the complex appraisal process.

Created for both the business person and seasoned valuation professional, ValuAdder Resource Center is conceived as a go-to reference that:

• Provides you with a thorough yet accessible coverage of the valuation process, accepted methodologies and situations that call for business appraisal.
• Assists you in making the informed choices of which business valuation approaches and tools to use.
• Helps you avoid the unnecessary expense of buying information that is otherwise freely available.