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When we develop an opinion of value for a particular operating business, we look at the quality of the financial information as either an additional risk factor or value driver. In business valuation and especially from an investor’s viewpoint, quality of the financial information or truthfulness of the data plays an important role. Everyone has… Continue >>>
Virtually every business has centralized management and/or relies on the talents of a few individuals. This risk of centralized management is taken into account for business valuation purposes in the company’s future earnings or rate of return (i.e., discount rate). In some cases, however, one person is the linchpin, and if he or she leaves… Continue >>>
Assessing risk is a crucial part of valuing a closely-held business. Business appraisers use risk assessments in the income approach to estimate rates of return (discount rates) and in the market approach to select valuation multiples. All else being equal, the higher a company’s risk, the lower its value, conversely lower risk (value drivers) increases… Continue >>>
What exactly does the term “goodwill” mean when it comes to buying or selling a business? Usually, the term “goodwill” is a reference to all the effort that an individual(s) puts into a business over the years that he or she has operated that business. In a sense, goodwill is the difference between an array… Continue >>>
In finance, we use words like price and value, as if they were interchangeable. I have been guilty of this myself at times. It is worth noting, price and value not only come from different processes, but are determined by different variables and yield different numbers at the same point in time. The essence of… Continue >>>
In October of 2003, I co-chaired a valuation roundtable session with Dr. Shannon Pratt, a highly regarded individual within the business appraisal profession. A question was asked regarding the use of market data in the market approach as it applies to the valuation of closely held companies. I thought it would be helpful to revisit… Continue >>>
Most business owners know that planning for retirement is crucial. However, according to Entrepreneur magazine, very few business owners are aware of the true value they have. Many have not taken the necessary steps to receive an accurate business valuation well before considering retiring. This makes it somewhat difficult to ensure they receive adequate value… Continue >>>
A sale of a corporation under an asset sale arrangement should be carefully planned to establish the personal goodwill that may exist and if it is being sold in a “separate transaction” apart from the sale of the assets of the corporation. This is particularly true where a closely-held C corporation’s transaction deal is structured… Continue >>>
Top Five EBITDA Adjustments Oftentimes, earnings before interest, taxes, depreciation and amortization (EBITDA) are used as a proxy for a firm’s operating cash flow. While EBITDA can be interpreted in different ways, this type of earnings stream can be used to produce a value for a business or business interest by the application of a… Continue >>>
The question that arises most often for many small business owners and others interested in purchasing a business is “what is a reasonable price for this business?” To some degree, every business is unique and therefore, there is no one-size-fits-all formula to determine the value. Years ago, I was visiting with a dentist who was… Continue >>>
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