You may have heard this: business value fluctuates as time goes on. Fair enough, but the question you may ask is what factors best capture this change? Here is our short list: Discount rate Capitalation rate Valuation multiples The reason these numbers are in a constant state of flux is that the marketplace conditions vary… Continue Reading
So why do you run across business appraisal result differences? You might think: if all business appraisers follow the standards such as USPAP and AICPA SSVS how come the results differ? The main reason is that clients influence the outcome of professional business valuations. Business people have a reason for business appraisals and an idea… Continue Reading
The discounted cash flow or DCF valuation method is perhaps the most widely used technique in income based business appraisals. If you take a look at the calculation, you will notice that it consists of two parts: A discounted forecast of future earnings over a finite time period A so-called terminal value calculation The idea… Continue Reading
You can see from our discussion of business valuation that there are a number of ways to determine what a company is worth. In theory the results you get by using the different methods should give you very similar answers. That often is indeed the case, yet the actual business values calculated with various methods… Continue Reading
When you value a business the result is valid for the present time. As business conditions changes so does the value of a company. One way to use this idea is to track how business value changes over time. If you run a number of business valuations over a number of years, you can see… Continue Reading
It is well known that all business valuations are done as of a certain date. It is possible to prepare a business appraisal at some point in the past. One benefit of this is that you have some ideas as to how things actually turned out. In fact, professional business appraisals are sometimes done as… Continue Reading
The concept of control premium in business valuation is this: to obtain control of a business the investor usually has to pay the per-share price that is higher than what a single share of the company stock sells for. Why would an investor seek a controlling share of a company? Because with control come a… Continue Reading
Valuation multiples are commonplace in business valuations. Their appeal is that it is easy to estimate your business value by comparison to sales of similar companies. Yet no two business enterprises are the same. How can you make sure that the valuation multiples you use give you the right answers about your company’s worth? Focus… Continue Reading
If you check the leading standards on business appraisal, all properly done business valuations require some sort of a report. In fact, the venerable Uniform Standards of Professional Appraisal Practice (USPAP) dedicate a complete Standard 10 to specifying the scope and format of a business valuation report. The idea is to communicate to others what… Continue Reading
For valuation of companies that pay income taxes at the entity level the business appraisal needs to take this into account. In a vast majority of professional business valuations you are likely to see, the local (e.g. state) and national (e.g. federal) income taxes are combined into a composite income tax rate. In the US,… Continue Reading
Asset approach, also known as the cost approach, is one of the three major ways to value a business. Formally, this approach relies upon the economic principle of substitution: The business value equals the cost of recreating an enterprise of equal economic utility. The idea is that two businesses that generate the same economic benefits… Continue Reading
The key assumption behind the market comparable valuation methods is that the value of a business is revealed once you see what similar companies sell for. If a piece of business equipment has been sold in, say, the last six months for $350,000 then it is likely that we can get about the same if… Continue Reading
Valuation multiples that relate business value to some measure of its earnings are among the most typical tools used in business appraisals. There are essentially two types of such valuation multiples: economic multiples that relate business value to its cash flow accounting multiples that use any of the well known business profitability metrics. Business appraisers… Continue Reading
S corporations are so-called pass through entities. The company itself pays no income taxes. Instead, the shareholders pick up their share of business earnings and put them on their own tax returns. This is big savings compared to the double taxation common with the C corporations. Pre-tax or after-tax earnings for your business valuation? When… Continue Reading
Are you considering valuation of a commercial building contractor firm? Check out these industry statistics: There are some 38,000 commercial and institutional construction companies, classified under the SIC code 1541 and NAICS 236220. These construction firms generate a combined $372.5B in annual revenues. The industry sector employs an impressive 654,178 of professional and administrative staff,… Continue Reading