The ABC's of Business Valuation
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Transcript of The ABC's of Business Valuation
THE ABC’S OF BUSINESS VALUATIONJim Turner, C.P.A. CVATurner Business Appraisers & Advisors
SEMINAR OBJECTIVES You will learn how to utilize the 3 established
approaches to value a business and we will estimate the value employing a good rule of thumb
By the end of our session you will understand the basic steps required to calculate the value of a business….Valuation is both an Art and a Science
We will discuss the nuances of valuing businesses; including marketability discounts, normalizing adjustments and the concept of control
BUSINESS VALUATION & THE BABY BOOMERS
75 Million baby boomers
7 Million own privately held businesses
It is forecasted that between 1.36 and 2 million firms will be for sale in the next five to ten years
United States birth rate (births per 1000 population). The red segment from 1946 to 1964 is the postwar baby boom.[2]
WHY VALUE A BUSINESS?
Buy/Sell decisions
Gift or Estate Tax (IRS)
Shareholder actions
Equitable distribution
Key man or Key Woman Life insurance
WHO ARE THE EXPERTS
ABV = Accredited in Business Valuation
CVA = Certified Valuation Analyst is a CPA, MBA, Ph.d or Degreed Financial Professional
ASA = An Accredited Senior Appraiser
APPROACHES TO VALUING A BUSINESSThe established approaches to value IRS Revenue
Ruling 59-60 Income Approach Market Approach Asset Approach
Sanity Check/Quick estimate Rules of thumb
SAMPLE BUSINESS VALUATION Purpose of the valuation – The owner is
contemplating selling the business; so he wants to know the fair market value of the business in exchange
Common deal terms of a small business transaction Asset Sale
Includes: Equipment, inventory and goodwill Does not include: Cash or accounts receivable
THE AMERICAN DREAM
OUR ENTREPRENEURS
Living the Dream!
SAMPLE BUSINESS VALUATION
SAMPLE BUSINESS VALUATION
SAMPLE BUSINESS VALUATIONINCOME APPROACH
SAMPLE BUSINESS VALUATIONIBBOTSON BUILD-UP METHOD
Source: 2013 Ibbotson® Stocks, Bonds, Bills and Inflation Valuation Yearbook, Morningstar, Inc., Chicago, Illinois.
SAMPLE BUSINESS VALUATIONINCOME APPROACH
SAMPLE BUSINESS VALUATIONMARKETABILITY DISCOUNT (INCOME APPROACH)
SAMPLE VALUATION MARKET APPROACHPRATTS STATTS® DATABASE SIC:5812/NAICS:722515
SAMPLE VALUATION MARKET APPROACH
SAMPLE VALUATION ADJUSTED NET ASSET VALUE APPROACH
The appraised fair market value of the equipment was $60
SAMPLE BUSINESS VALUATION Summarized results table
Based upon the results of the 3 approaches to value; our opinion of value for the subject company is $1,500
SANITY TEST
SANITY TEST CONTINUATION
USING RULES OF THUMB
RULES OF THUMB The single best source for rules of thumb for
small business is the, “Business Reference Guide,” published by Business Brokerage Press
Pricing multiples: multiples of EBITDA or SDE Sellers discretionary earnings is earnings before
interest, taxes, depreciation and amortization plus one owners salary or “EBITDAOC “
– Multiple of sales
RULES OF THUMB Restaurants --- Limited Service (NAICS
722211) Rules of Thumb
30 to 40 percent of annual sales for independents; 45 to 60 percent for many franchises---plus inventory
1.5 to 2.5 SDE (Sellers Discretionary Earnings) plus inventory
Source: West, Thomas L., 2013 Business Reference Guide, “Published by Business Brokerage Press.” Page-689
RULES OF THUMB
*Rule of Thumb #1 is in harmony with the results of the income approach and our opinion of value - $1,500.
PART II – THE FUTURE AFFECTS VALUE TODAY
INDUSTRY INDICATORS US consumer spending on services, a measure of
demand for specialty eateries, rose 1.9 percent in August 2013 compared to the same month in 2012.
US personal income, which drives consumer spending at specialty eateries, rose 3.7 percent in August 2013 compared to the same month in 2012.
US retail sales for food services and drinking places, an indicator of specialty eatery sales, increased 3.8 percent in the first nine months of 2013 compared to the same period in 2012.
http://subscriber.hoovers.com.proxy183.nclive.org/H/industry360/overview.html?industryId=1445
INDUSTRY GROWTH FORECAST
Source:http://subscriber.hoovers.com.proxy183.nclive.org/H/industry360/overview.html?industryId=1445
First Research forecasts are based on INFORUM forecasts that are licensed from the Interindustry Economic Research Fund, Inc. (IERF) in College Park, MD. INFORUM's "interindustry-macro" approach to modeling the economy captures the links between industries and the aggregate economy.
FEDERAL RESERVE BEIGE BOOK Fifth District--Richmond Beige Book --
October 16, 2013
District economic conditions improved modestly, on balance, since our last report.
Source: http://www.federalreserve.gov/monetarypolicy/beigebook/beigebook201310.htm?richmond
NORTH CAROLINA ECONOMIC OUTLOOK SUMMER 2013 Executive Summary: A Return to Growth, and the
Old Issues
Economic improvement is expected to continue in North Carolina in the second half of 2013 and in 2014.
Nationally, 2 million payroll jobs will be added in 2013, and 2.5 million payroll jobs will be added in 2014, thereby lowering the jobless rate to 6.8% at the end of 2013 and 6.2% at the close of 2014.
Source: http://ag-econ.ncsu.edu/sites/ag-econ.ncsu.edu/files/faculty/walden/nceconomicoutlooksummer2013.pdf
CHARLOTTE MSA ECONOMY
The Charlotte-Concord-Gastonia area economy grew by nearly five percent in real terms in 2012 making it the 29th fastest growing out of 381 metropolitan areas in the country.
This growth was broad-based and propelled by strengthening financial services and durable goods manufacturing among others.
Source:http://www.nccommerce.com/LinkClick.aspx?fileticket=5USMpqUbpJU%3d&tabid=3466&mid=9134
THE ABC’S OF BUSINESS VALUATION SAMPLE #2
What if the business is expected to experience revenue and profit growth in subsequent years?
Sample 2 revenue & expense growth assumptions:
SAMPLE-2 WITH 4-5% ANNUAL GROWTH
SAMPLE -2 DCF WITH FORECASTED 4-5 % ANNUAL GROWTH RATE
PART III – “APPLES TO APPLES ”COMMON SIZE ANALYSIS
COMMON SIZE BALANCE SHEET
*Source: https://www.profitcents.com/USEN/runreport/generatereport.aspx?GUID=40b10acb-4149-4d43-9b7c-cbd4b6e1e2f2
COMMON SIZE INCOME STATEMENTS
*Source: https://www.profitcents.com/USEN/runreport/generatereport.aspx?GUID=40b10acb-4149-4d43-9b7c-cbd4b6e1e2f2
LIQUIDITYA measure of the company's ability to meet obligations as they come due.
Checking the pulse of a business: Key Financial Ratios
= (Cash + Accounts Receivable) / Total Current Liabilities
PROFITS & PROFIT MARGINA measure of whether the trends in profit are favorable for the company.
= Gross Profit / Sales
ASSETSA measure of how effectively the company is utilizing its gross fixed assets.
= Net Income / Total Equity
OVERVIEW OF I&N, LLC. RATIOS COMPARED TO INDUSTRY PEERS
Rating Metric
LIQUIDITY
PROFITS & PROFIT MARGINSALES
BORROWING
ASSETS
Source: https://www.profitcents.com/USEN/runreport/generatereport.aspx?GUID=40b10acb-4149-4d43-9b7c-cbd4b6e1e2f2
PART IV – “NORMALIZING” IS AN EFFORT TO ADJUST TAX OR GAAP BASIS FINANCIALS INTO ECONOMIC REALITYIt is widely accepted that most financial statements often paint a picture that is different from economic reality*
Highly aggressive expensing policies to reduce income taxesExcessive or insufficient compensation to owner(s)Lavish perquisites (perks) paid to the owner(s)Leases (Capital vs. Operating)
Source: “Business Valuations: Fundamentals, Techniques and Theory,” 1995-2009 National Association of Certified Valuation Analysts 2009.v3, page-3-3
SAMPLE #3 NORMALIZING ADJUSTMENT TO OWNERS COMPENSATION
NORMALIZED NET CASH FLOW
SAMPLE #3 CAPITALIZATION OF EARNINGS METHOD W/WAGE NORMALIZING
CONCLUSION Fifty-one percent is usually one-hundred
percent better than forty-nine percent. Peanuts, popcorn, cotton-candy,
cigarettes….discount for a lack of marketability Render unto Caesar that which is Caesars
(normalizing adjustments)
OUR ENTREPRENEURS AFTER THE SALE