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At least weekly we are asked to look through a valuation report, and find ourselves saying, “what in the world…?” Most often, the document supplied to us for review, cites earnings before interest, taxes, depreciation and amortization (EBITDA) with adjustments to historical financial information. Adjustments can be perfectly acceptable, as owners run excess personal expenses… 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 >>>
This is a good time to reflect on three important and misunderstood aspects of the role of the valuation professional: The valuation professional. The nature of the finding. How are the findings used. Role of the Professional: Valuation professionals may act as either an “appraiser” or “consultant” – but not both in a single engagement.… Continue >>>
Adjustments for reasonable or replacement compensation – whether in corporate practice or when conducting a business valuation can be one of the most difficult adjustments to quantify. There are numerous factors that should be considered when adjusting compensation levels. Oftentimes, American Business Appraisers find an individual’s, whether they are the owner or principle within the… Continue >>>
The Tax Cut and Jobs Act (TCJA) contains a provision for reasonable compensation as defined in IRS Code Section 162. Reasonable compensation has always been an important issue in business valuation, but the TCJA has put a much brighter spotlight on the matter, which will be closer scrutinized starting in 2018. There is a new… Continue >>>
The term “value” means different things to different individuals. I’m not sure who made that statement many years ago, but it still holds true today. The perceived value depends on the interpretations, circumstances and role of the shareholder(s). Without carefully defining the term “value”, a conclusion reached in a valuation report will have no meaning.… Continue >>>
The three key factors are profitability, growth and risk. Profitability, or more specifically, anticipated benefits will be the most important consideration by investors (i. e., buyers). Anticipated benefits will consider such items as the nature, capital structure, and historical performance. Growth considerations are generally the expected growth in earnings, along with the anticipated outlook for… 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 >>>
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 >>>
What is the process to complete a business valuation? Valuing a privately held business is not an exact science. To do it accurately requires experience and the ability to examine all the risk factors and value drivers involved. A business valuation typically takes three to five weeks to complete, depending on the size and scope… Continue >>>
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