Business Valuation - The Best Definition of Earnings For Small Business

Even with the simplest small company, business valuation can seem like an incredibly complex topic. But if your reason for performing the valuation is because you are selling your business, the valuation process should be fairly simple.

Buyers are interested in buying your business because of its profits. That is why I have always advocated using a multiple of proven profits as the best way to come up with a value for your business and a range for your asking price.

But even with this simple method, there are endless ways to vary the outcome: do you use past profits or projected future profits? Before or after taxes?

Come to think of it, how do you even define the word "profits"?

Does it mean the same thing as cash flow?

Let's discuss all of these questions.

But first, let me point out that the method described here is best for smaller businesses (less than a million in sales) where the owner also manages the business. Also, most of this won't apply for very new businesses or ones that have no profits. For those types of businesses you should use an "asset based valuation".

Which Earnings Do You Use?

If you are going to convince a buyer to choose your business over all the other businesses on the market that they can buy, you have to appeal to her motives. Setting your price range based on your actual proven profits (as opposed to speculating about future profits) makes the most sense to the buyer. It directly addresses her main concern - how much money the business actually makes!

Now for the key question: How do we define "profits"? Do we use cash flow? Or do we use something called EBIT(earnings before interest and taxes)?

The best, most logical number to base your valuation on is "Owner's Benefit". Accountant types like to call this "Seller's Discretionary Cash Flow".

The formula for determining the owner's benefit is:

Annual Pretax Profit + Owner's Salary + Owner's Perks/Benefits + Interest + Depreciation.

This number will tell the buyer how much money the business actually has been generating for you as its owner. Since the buyer's interest and tax payments will be different than yours, you want to include tax and interest payments in the total owner's benefit number.

From there the buyer can make their own estimates of what their interest and tax payments will be.

"Perks and Benefits" can include things such as automobile leases, travel expenses, salaries for family members that are over and above the marker rate for the work they perform. Any of the good stuff that you get in addition to your salary that the business pays for should be included in the "Owner's Benefit".

But the key concept here is that the owner's benefit is the amount of money + other benefits the business generates for the owner. And since the prospect is buying the business in order to get that money and benefits, the owner's benefit number is where any valuation should start.

I suggest you use an average of your last 3 years owner's benefit as the basis of your valuation.

If last year was a really good one, you may be tempted to use just the owner's benefit from the most recent year instead of the last three. I recommend you use three years because that creates more credibility with the buyer. Especially if your most recent year has been significantly better than any previous year, the buyer may regard it as a fluke or even worse - they may suspect you have manipulated the numbers.

If your profits have been trending up for each of the last three years you should consider weighting the more recent years more heavily. For instance, instead of adding up your owner's benefit from the last 3 years and dividing by three, you can take 70% of you most recent year plus 20% of the prior year plus 10% of the year before that.

AUSTIN BUSINESS VALUATION

SAN ANTONIO BUSINESS VALUATION

Patrick Jennings is the founder of several web sites related to the buying and selling of small businesses including http://www.TheBizSeller.com - a for-sale-by-owner site that helps you sell your business as fast as possible and without using a broker. His How To Sell Your Business videos are locate at: http://www.youtube.com/thebizseller

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Business Valuation Methods - Why Rules of Thumb Work For Many Small Business Valuations

The process of valuing a business has sometimes been referred to as more of an art than a science. Here is a fundamental truth about the valuation of an enterprise. It is only worth what someone is willing to pay for it.

You might say that this is not a very helpful statement. If you want to know the value of your business, how can you know how much it is worth before someone pays for it? You can't (exactly). But you can have a person (usually an accountant or a broker) give you a value. But what this really entails is an estimate of what the person doing the valuation thinks a willing, but not anxious buyer, who is fully informed might pay. But it is only ever going to be an estimate. The true value cannot be known until someone puts their signature on a contract with the sale price on it.

In Australia, as probably in many other parts of the world, the population, on average, is ageing. There is an enormous shift of wealth and assets from the older to the younger generations. And this means there are a lot of business sales occurring and going to occur. Now when you sell something, you have to have an idea of what you're going to sell the item for. In a business sale, the price is not often openly disclosed. The purchaser needs to make a bid for the business. Therefore the purchaser also need to get a value of the enterprise, or at least some idea of a reasonable price.

All this is to say that determining the fair value of a business is now, and is going to continue to be, an important issue. It is somewhat disconcerting to say that the value of the business is more an art than a science. Surely the value can be determined/estimated fairly accurately? Well, often not. This is because there are so many different issues that valuers take into account. Some valuers will put more emphasis on a particular issue as compared to another. One valuer will have more knowledge of an industry than another and see value in certain things that another will not and so on.

Rules of Thumb

It seems that the smaller business, the easier it is to determine/estimate its value accurately. This is particularly so where there are large numbers of essentially the same types of business. An example (in Australia) is Fish and Chips shops or small accounting practices. Readers from other countries might relate more to a take-out pizza shop.

The reason for this is that "rules of thumb" have developed in relation to these types of organisations. Often these rules of thumb are based on the turnover for the last financial year. For example, an enterprise in a particular industry might sell for two times revenue. That is, if the annual sales were $500,000, it will sell for $1 million.

On its face, this seems illogical. How can you purchase a business based on sales without knowing the profit? The reason that rules of thumb gain wide-spread use is because the rate of profitability of businesses of the same type are assumed to be about the same, or if the business being purchased has lower than the standard rate of industry profitability, it is assumed that the new owner can quickly achieve that rate of profitability due to the business being so generic.

However, be careful using rules of thumb. Sometimes they can produce absurd valuations.

Wishing you easier business.

John Jeffreys

John Jeffreys wants you, the business owner or manager, to have an easier life. John Jeffreys helps you to achieve this by drawing on his 30 years business experience as a Chartered Accountant and partner in major accounting firms. For instant access to videos, audios and software products, visit http://www.businessease.com.au

Article Source: [http://EzineArticles.com/?Business-Valuation-Methods---Why-Rules-of-Thumb-Work-For-Many-Small-Business-Valuations&id=2604772] Business Valuation Methods - Why Rules of Thumb Work For Many Small Business Valuations

Business Valuation is Now Required For SBA Loans

An applicant or applicants for an SBA loan can use the loan to purchase a 100% interest in an existing business. As a rule, the seller of the interest "must not remain as an officer, director, stockholder or employee of the business." If the loan meets or exceeds $350,000, the SBA now mandates that the loan documentation file must also include "a business valuation from a qualified source". The SBA defines a qualified source as "an individual who regularly receives compensation for business valuations and is accredited by a recognized organization." An example of such accreditation, and cited by the SBA, is the Accredited Valuation Analysts (AVA)/Certified Valuation Analyst (CVA) granted by the National Association of Certified Valuation Analysts (NACVA). According to the NACVA website, the only difference between a CVA and an AVA is that a CVA also holds a CPA certification; an AVA generally holds advanced business degrees, such as an MBA or PhD, or both.

Typically, there are two types of valuation reports; "complete" and "other". For complete valuation reports, a site visit is done by the business valuation expert, company officers are interviewed, photographs are taken, documents are reviewed, and other substantive information is gathered. A complete report is extremely comprehensive, and can be many pages in length. Reports that are classified as "other" are typically calculation reports (a calculation of value) or summary reports (includes a brief summation that explains the calculations, as well as some economic data). The SBA SOP 50-10(5) adds guidance as to the type of report it looks for in the loan file, stating that "a site visit of the assets acquired be done", and that "the lender must document in it its loan file the date of the site visit as well as comments." This language implies that third-party's conducting the business valuation must perform a complete report, as other types would not typically be as comprehensive. Therefore, a valuation classified as "other" may not suffice as an adequate business valuation as required by the SBA.

For more information on the SOP 50-10(5) "Lender and Development Company Loan Programs" issued by the SBA, or other business valuation inquiries, please contact Joel Nowakowski, MBA, AVA, Principal, JN Capital Advisors Business Valuation Services Group at (203)769-6156 (direct) (860)315-0455 (cell) [mailto:joel@jncapitaladvisors.com]joel@jncapitaladvisors.com

Joel Nowakowski, MBA, AVA - Principal,JN Capital Advisors,Hartford, CT
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Business Valuation Firms Help Companies Facing Catastrophe Strategize Early to Increase Results

By Sarah Simmons

With the economy in the deepest recession it has seen in decades, many companies are struggling to stay in business by reorganizing, filing for bankruptcy or, unfortunately, liquidating groups of assets or the entire business. However, these decisions should be made months in advance - not at the time of crisis. Even if you are busy focusing on turning around your company, it is essential to plan for disaster. You may not want to think about this possibility, but by planning in advance - just in case - the value received from the sale of your company's assets can be dramatically improved, oftentimes by multiples of what would be realized in a liquidation and/or public auction.

Hindsight is always 20/20, but substituting hindsight with foresight can be even better than 20/20 vision. Preparing a comprehensive liquidation strategy for your company in advance can ensure your catastrophe won't be catastrophic. While all companies are different, there are several factors that should be carefully considered by any company at the first sign of financial difficulty.

Inventory Monitoring

Before any obvious signs of trouble appear, monitoring your inventory can provide you with a warning signal. You probably already manage your inventory on a go forward basis, but customized reports can be developed that highlight changes in the quantities of key inventory components and help improve inventory management when cash is tight. This can provide you with the opportunity to be proactive about dispositions of slow moving, obsolete and/or non-strategic inventory to create the working capital needed to maintain critical operations. A good investment recovery company can help you creatively manage the controlled disposition of inventory during the normal course of business without raising any concerns among existing customers or in the overall marketplace.

Essential Employees

Should your business flounder, laying off personnel may be the first thing that comes to your mind when cutting costs, but during liquidation, key personnel can be essential to maximizing your value. The goal is to know exactly who these essential employees are before it is too late. Many of your integral personnel can be kept on staff with suitable financial incentives which can be budgeted for in advance. When considering who is essential, keep in mind who will be needed to shutdown machinery or plant systems, who can help complete major transactions, or who is the most familiar with your company's information technology or financial information.

Company Production Information

If your company or plant has shut down, buyers can't know the full potential your business offers. By collecting company production information such as product samples, photographs, historical production reports, maintenance records, and even video, everything necessary is available to provide buyers with the facts needed to make an informed purchase decision. This information is the next best thing to seeing the plant operating and can be leveraged immediately in negotiated sales as well as in online and on-site auctions.

Intellectual Property

Assembling, cataloging and securing the detailed information regarding your company's intellectual property (IP) should be done with great care. You will want it available so that qualified buyers will have the necessary information needed to enter into a competitive bidding environment. By investing time in this organization and preparation,, you can maximize the value of your IP.

Bundling Strategies

Simply moving straight to a public auction after your business fails can result in money being left on the table. By preparing ahead of time, you can bundle certain assets no longer strategic to your company, such as product lines, specialized machinery, dedicated inventory, customized real estate, customer lists, accounts receivables and more, and offer them to pertinent buyers. Preparing in this way can often mean the difference between realizing huge premiums and suffering huge losses.

Start Now

Even if your company or business is healthy and in-the-black, it never hurts to be prepared - especially in this economy. No one wants to think about failure, but planning for the worst often brings out the best circumstance. By hiring an experienced consultant who understands what makes your assets valuable, you can prepare a successful back up plan that can mitigate your losses in the event of a crisis.

AccuVal is a global valuation and consulting firm that helps companies "up" their success. They provide a broad range of [http://www.accuval.net/]business valuations and asset management solutions, including goodwill impairment, fresh start accounting, purchase price allocation, [http://www.accuval.net/services/valuation_advisory/tax_management/409a-valuation.php]409a valuation, and trademark valuation, that empower companies to confidently make strategic business decisions and achieve greater success.

Article Source: [http://EzineArticles.com/?Business-Valuation-Firms-Help-Companies-Facing-Catastrophe-Strategize-Early-to-Increase-Results&id=3402041] Business Valuation Firms Help Companies Facing Catastrophe Strategize Early to Increase

Business Valuation - Baby Boomers Tipping The Scales?

By Scott Gardner

You, or someone very close to you, are part of 78 million Americans that make up the largest population segment in the United States: Baby Boomers. This generation is classified as anyone born between 1946 and 1964. According to a recent study by BIG Research, 9% of boomers with household incomes exceeding $50,000 are small business owners. Using simple math that means 7 million companies in the United States are owned by individuals 44 – 62 years old.

If you or a family member fall into this category (baby boomer
business owner), what is your exit strategy with your business?
Currently, 33% of business owners in America will successfully
transfer their family business to the next generation (Family
Firm Institute). If you fall into the majority of US business
owners (67%), then your children (X & Y generations) have most
likely opted to not follow in your footsteps of taking over the
family business, leaving you with significant, life shaping
decisions.

It is safe to say that 5 million baby boom business owners do
not have a son or daughter aligned to take over their
privately-held business (due to choice or circumstance). This
massive group of societal leaders is now left with only a
handful of options:

• Keep the business well into their retirement years, possibly
leaving it to estate settlement proceedings
• Dissolve the business should competent leadership not be in
place after retirement
• Sell the business to a qualified buyer and have financial
stability for future retirement and heirs.

Based on the financial burden Baby Boomers have from their
children, parents and own personal lives, combined with the wave
of owners reaching retirement sooner rather than later, we
recommend the latter -- sell the business.

The Exit Planning Institute has projected that over the next
12-15 years, more than 8 million privately-held US companies
will be sold. This is a tidal wave of “for sale” companies
flooding the market place, primarily due to baby boomers seeking
retirement. The sheer volume of companies for sale will
inherently reduce purchase prices due to simple supply-demand
economics; tipping the balance of available businesses for sale
compared to capable, motivated business buyers. Trying to stand
out in a crowd of sellers will be difficult due to a saturated
marketplace of other baby boom-owned businesses. Those business
owners that truly plan ahead and start executing their exit
strategy today, can avoid a major dilemma and be prepared for
the future (a flooded marketplace of similar companies for
sale).

In order to start the process of planning the sale of your
business, you first need to know what that business is worth.
Determining the fair market value of your business can be an eye
opening and empowering process. Seek out professional,
independent expertise in order to conduct an accurate business
valuation report. For the purpose of planning and determining
fair market value, you should expect business valuation fees to
range from $3,000 - $7,000, relative to the size and
complexities of your small business operation. Once you have
identified what the company is worth, you can then make
decisions with confidence and choose your future path wisely.
You will also be able to better understand value drivers
specific to your type of business and industry. If the stars
are aligned, you may wish to consider selling the business
sooner rather than later. If the value is lower than you had
expected, you can strategically grow and refine your business to
increase value for your future exit. Timing is everything in
the sale of a business.

Don’t try to go at it on your own as that can be a long,
painstaking process filled with inaccuracies and frequent
misses. Rely on trained professionals and advisors to guide you
down the exit planning path and give yourself plenty of time to
do it right. A typical exit advisory group could consist of an
attorney, accountant, business appraiser, business
intermediary/broker, and financial planner. For smaller
businesses, a couple of these roles can be consolidated for cost
efficiencies.

Now more than ever it is critical that baby boom business
owners figure out where they stand so they can strategically
navigate for the future. You may have heard the adage, how can
you be lost if you do not know where you are going? Ask yourself
where you want to end up in life, not just for yourself but your
family. What new challenges or hobbies do you want to take on
in the second half of your life? Can you afford to do these
things? Determine your ideal destination and end result, then
reverse engineer your path to reach those specific goals. For
the retirement planning of a small business owner, the starting
point in all of this should be a small business valuation. It
takes years to build a successful business, don’t rush your
exit. Know your value, know your business!

About the Author: Scott Gardner is President of
http://www.FairMarketValuations.com, one of the nation’s largest
networks of business valuation consultants. 400+ experts serve
all major US markets - Fair Market Valuations delivers
face-to-face business valuation to small business owners
planning to sell or grow.

Source: http://www.isnare.com

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