If you take a look at ValuAdder online presentation, you will notice quite an array of valuation methods available. This is not surprising as most professional business appraisals are done using a number of methods. Why so? Because no one valuation technique is definitive.
Each method looks at business value from a unique perspective. For example, the well known discounted cash flow method calculates your business value from an earnings forecast and discount rate which captures the business risk. Note that this income based method does not directly account for business assets. Nor does it compare your business to sales of similar businesses.
Other popular methods include the market based comparisons to sold companies in your industry sector. Here, you are looking for guidance from the market place as what similar companies are worth. You get the “going rate” based on statistical evidence. However, if your company is unique, the market valuation methods may fail to incorporate that in the value estimate.
Asset rich companies, on the other hand, can be valued using such methods as the capitalized excess earnings. If you are dealing with valuation of a well established company, you may wish to determine the value of goodwill. That’s what the excess earnings technique gives you, in addition to the overall value of the company.
With ValuAdder, you can choose the methods that fit your unique business. If you are doing a number of valuations, you can configure ValuAdder to use the methods you want for each. No boiler plate calculations that are irrelevant to the task at hand. You are always in control of your business valuation work.
For each valuation method you use, ValuAdder automatically prepares a calculation report. Just click on the Report menu when you are done with your analysis. ValuAdder creates the valuation report summarizing your assumptions and displaying the business value results.
If your situation requires a formal, standards compliant, business appraisal report, you can take advantage of the Report Builder tool. The Report Builder saves you time and effort by preparing a fully editable business appraisal report template. The new report opens in your Word or compatible editor, ready for your inputs. Helpful comments throughout point out the areas in the report requiring your editorial input. As a result, you can finish a full-featured, professional appraisal report in a fraction of the time you’d spend starting from scratch.
The report template is also useful as an organizing tool. It shows you instantly what is expected from a business appraisal and how the work should proceed. From financial statements to forecasts of earnings and business risk assessment, to method selection and calculations, all the way to a fully supported conclusion of business value.
Private companies have a choice of doing their accounting on the cash or accrual basis. You may wonder: is either choice more suitable when it comes to valuing the company?
The question you face in a typical business appraisal is this: are all business income and expenses identified and matched correctly? Suppose that a sales commission is due to be paid for a revenue generated in a given period. If you don’t show both the sales and commissions, you may overstate the business income. In this sense, accruing the necessary expense along with the sales generated is the proper way to show how the company creates and uses its funds.
Business value is all about earnings and risk. When you value a company you wear the hat of an owner so the question is: how much money can I take out of the business without starving it of the funds needed to keep the operation running?
That’s why cash flow based earnings measures, such as the net cash flow or seller’s discretionary cash flow, are more useful for business valuation than the typical accounting figures of net income, EBITDA or EBIT. Cash flows show how the business sources and uses its money and this includes matching the income and expenses in actual amounts and timing.
So the accrual financial statements are a good start. In addition, you would need to check into how the business uses its short and long-term capital. Is it necessary to build up inventory to meet increasing demand for products? Does the company need to set aside money to buy new machinery or fix some existing equipment?
These capital expenditures do not show up on the company’s income statement. However, such capital needs are quite real and can seriously change the cash flow picture. If the company needs to divert a sizable chunk of cash toward buying new technology, the money is not available for distribution to the owners. Same goes for expansion capital needed to grow the business. Such capital drains can change your business value quite a bit.
Incidentally, underestimating the capital expenditures is one of the most common mistakes made by business buyers. Take a look at how important it is to account for all the elements in a business purchase to make it a success.
You may have noticed the current frenzy over cloud computing. Some pundits tout cloud services as if it was a promise of ultimate salvation: the reduced cost of software ownership, upgrades that snap in magically, and ability to access the service on any web browser enabled device.
Sounds too good to be true? Unfortunately, many users move into the cloud without understanding the major security implications. Security problems have plagued cloud software and continue to be the key stumbling block to its adoption. Indeed, there are a number of serious concerns.
Customer data loss
If you followed the news, you may recall the spectacular customer data losses suffered by major retailers. Private customer information, including credit card data, have been lost affecting millions of people. Cloud based software acts like a magnet for cyber criminals. This is because such software vendors are known to store highly valuable customer information that crooks can exploit in a number of ways.
Consider a cloud service that offers business valuation online. Unsuspecting customers enter business critical information into a system controlled by the software vendor. Such information is a veritable gold mine for the criminals. Critical business intelligence can be gathered about yourself or your business.
Threats may come from outside hackers or malicious insiders that have access to valuable customer information.Your business information can be sold to the highest bidder, including your competitors.
Hardly the outcome any business person would expect to get by paying and using a software service.
Your business information is for sale – by the cloud software vendor
As if theft of your business information were not enough, another danger lurks where you least expect it. Yes, you guessed it, your cloud service provider is probably making a buck by selling your business information you have provided when using the software.
Be sure to check the online privacy policies published by the cloud software vendors. You would be shocked to find that many of these vendors openly admit that they intend to gather, use, and sell your business information.
Critical business information, such as tax returns, business financials, company management and business plans are highly valuable information. Your cloud vendor stands to make a nice profit by marketing this information right behind your back.
Many cloud vendors have a second line of business that consists of providing so-called business intelligence information. You read it right, that’s the information the cloud vendor gathers from its customers, that is then repackaged and offered for sale.
Business valuations commonly disclose business critical information that is shared on a confidential basis with investors, business partners, lenders, accountants or attorneys. Do not expect the attorney-client privilege to apply to any business information you enter into the cloud software vendor system.
Squeezed out of the cloud
When you install a software app on your computer, you expect a level of performance your system can provide. Unfortunately, this does not extend to the cloud services.
As your vendor signs up more customers, it does not follow that they invest in expanding their computing infrastructure. In addition, many cloud services do not scale well with increased customer demand. The result is progressive loss of performance.
Imagine you have a rush project to complete using the cloud software. If your vendor systems get overloaded, you are out of luck as the information highway turns into a sudden rush hour gridlock.
Denial of service
Cloud computing is a darling of online criminals. Shutting down cloud services is their favorite game. What does it mean to you? A sudden loss of access to software just when you need it most. This is quite a bit more than an annoyance of having to reboot your computer to get things going again. To make things worse, the denial of service attack may impair your service provider systems without shutting them down. You may well be billed for the use of resources consumed during the attack.
Do your due diligence
Despite all the buzz, cloud software is not a good fit for business valuation. Software apps installed directly on your computers deliver the performance you need, when you need it, while not exposing you to recurring subscription costs or the risks of losing business data.
As with any fad, some people may jump on the cloud software bandwagon without thinking through the implications. If you don’t understand the cloud provider’s service environment and protections you have no idea what to expect should data loss occur, your account be compromised by hackers, or your business or client critical information wind up in the wrong hands.
Check out the contract before you sign up. Odds are you may be expecting far more than the cloud software vendor is willing to provide. The business data you type in may be used by the cloud software provider in ways you do not approve.
Read the fine print, especially when it concerns loss of business data and liability that results. Is there an indemnity clause that protects you?
You may find that the recurring subscription costs of using the cloud service coupled with the risk of losing business or client data far outweigh the benefits.