How To Value Your Business - Part Three

Now that we've talked about the "type" of value (Fair Market Value vs. Strategic Value) and introduced the three methods of valuing your business, let's look a little more at each method. In practice, we look at the cash flow method first, then the comparable-sales method, then last at the asset method - although frequently we only look at the first two methods and discard the asset method.

However, let's look at the comparable-sales method first - that's the easiest to understand and apply.

In the "Comparable Sales Method" (let's call it the Market Method), we look at what companies comparable to yours have sold for. We look at the sales price of the company as a function of revenues, EBITDA, or some other measure. Most commonly, it is a measure of revenue or sales. For example, we observe that most CPA accounting firms sell for 1.2 times revenues. Or, that most restaurants sell for 0.5 times revenues. We have large databases of sales data that we can correlate prices vs. specific elements.

This is also where you hear about "rules of thumb" - for example, "auto repair shops sell for 2 times revenue plus inventory" - etc.

The downside to the market method is that each company is unique, and a general rule of thumb may not apply to your business. At best, this method is used as a sanity check against other methods - the rule of thumb should be in a reasonable range of the value obtained from the other two methods of valuation. However, a rule of thumb should never be used as a primary determinant of value.  It's sort of like a home remedy - it may help in some cases, but you don't want to bet your life on it!

To learn more about valuing your business and how to apply the market method, please feel free to contact me.

B. Dane Byers, CPA, ABV, CFF
Partner
Bassett  & Byers, P.A.
3701 Lake Boone Trail Ste 201
Raleigh, NC 27607
(919) 303-1049
dbyers@bassettcpas.com

How to Value Your Business - Part Two

Ok, so we've talked a bit about "fair market value" versus "strategic value", and you understand that "strategic value (what it's worth to you)" is usually higher than "fair market value (what it's worth to Mr. Smith)".

The investment world is driven by "Fair Market Value" - let's call this FMV to make it easier from here on. And, let's call Strategic Value "SV", although I'd prefer "SRV" as I'm a Stevie Ray Vaughan fan but we can go with SV.

There are three (3) basic valuation models. Not two, and not four - there are only three.

First is the cash flow model - either historical cash flows or anticipated future cash flows are used to determine a value of the business. There is a lot more to this model that we'll discover in future posts, but for now just understand that a company is worth what it's cash flows are.

Second, we can look to what other similar companies have sold for. This is like the appraisal you get on your personal residence - we look at sales of businesses similar to yours. Again, there are a lot of caveats here.

Third, we can look at what the assets of the company are worth, including intangible assets such as brand recognition, goodwill, etc. This is the easiest of the methods to understand, but one of the hardest methods to apply. More on that later....

If you're ready to value your business, please feel free to contact me, I'll be glad to explain the process to you and help you value your business.

B. Dane Byers, CPA, ABV, CFF
Bassett & Byers, P.A.
Partner
3701 Lake Boone Trail, Ste 201
Raleigh, NC 27607
(919) 303-1049
dbyers@bassettcpas.com

How to Value Your Business - Part One

THIS IS PART ONE OF A SERIES OF POSTS ON HOW TO VALUE YOUR BUSINESS

Your business is probably the largest asset you own (next to your house, which has probably gone down in value the last few years), and it's almost like your only child. You've nurtured it for years or decades, and when it's time to separate, you want it to be well-taken care of. Or, maybe you don't - you just want the most amount of money you can get for it (your business that is, not your child....) - neither viewpoint is wrong; on the contrary, it's something you've created, and you have the absolute right to determine how you want to divest it and spend your retirement.

The first step in understanding the value of your business is understanding the definition of the word "Value." Now, I'm not talking about the Clinton-esque stylings of asking for the definition of the word "is", but I recognize that there are differing definitions of value....For example, how many times in the last few months have you heard a neighbor say they want to sell their house, but they can't get what it's worth right now....That's actually a very good object lesson on the difference between Fair Market Value and Stragetic Value. "Fair Market Value" is what the property is worth to the average, uninterested buyer - but Strategic Value is what it's worth to YOU. Strategic value is always higher than Fair Market value.

The first step in selling or buying a business is to understand the definition of "value" and how that affects your purchase / sale decision. To get a better understanding of the definitions of "value" and how it affects your decision, feel free to contact me.

B. Dane Byers, CPA, ABV, CFF
Bassett & Byers, P.A.
Partner
3701 Lake Boone Trail, Ste 201
Raleigh, NC 27607
(919) 303-1049
dbyers@bassettcpas.com

Last Chance to Take Advantage of the Great Recession

Wealth isn't created when the markets are up - contrarily, wealth is created when the markets are down. Think about it...the most basic of economic theorems is "buy low, sell high." Or, to put it in the words of the world's most successful investor - Warren Buffett, "Be greedy when the markets are fearful, and be fearful when the markets are greedy." We are standing at the precipice of an economic rebound and higher company valuations. As a matter of fact, day-by-day we are hearing that the economic rebound will be much stronger (sans job-creation) than anyone expected - just spend a few minutes watching CNN, CNBC, MSNBC, Fox News or Bloomberg. The positive economic data is coming in at a rate higher than the negative economic data was coming in just a year ago.

While this may be great for buyers of businesses, if you are a business owner that wants to transfer your business to your children or your children's children, you have a once-in-a-lifetime chance to get the lowest possible valuation (and related gift-tax liability) of your business in nearly a century. This could save your family literally hundreds of thousands or even millions of dollars in estate taxes.

This door is quickly closing, so if you want to transfer your business to future generations, now is the time to act to minimize transfer taxes to a level we haven't seen in over a century. For more information, please call me at 919-303-1049. I'll be glad to talk with you and your advisors about the current planning opportunities and strategies to transfer your wealth to future generations at the lowest tax rates in history.

B. Dane Byers, CPA, ABV, CFF
Bassett & Byers, P.A.
Partner
3701 Lake Boone Trail, Ste 201
Raleigh, NC 27607
(919) 303-1049
dbyers@bassettcpas.com