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Business ValuationsValuation Approaches & Methods
To Arrive at Fair Market Value
Fiscal Advantage, LLC
Roger Jacobi, CEO Dan O’Connell, VP & Founder
Agenda Definitions Four Critical Valuation Components Adjustments to Financial Statements Restated Statements
Calculation of Capitalization Rate Estimating FMV – 5 approaches to value Calculating “blended” FMV Validating the FMV
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Please describe theorganization you work for.
Poll Question #1
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Financially driven valuation Quantitative data with 10 subjective questions Only accurate for profitable companies Not IRS Compliant May underestimate FMV for high growth
companies Good estimate of FMV for 90+% of businesses Great Planning tool
Disclaimer
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Valuation Definition
“Business valuation is a process anda set of procedures used to estimate
the economic value of an owner'sinterest in a business”.
Wikipedia
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Valuation DefinitionFair Market ValueThe value a buyer and seller would agree upon
Where the economic incentive to purchase isequal to the economic incentive to sell
With complete access to all information
On-going business & not asset values
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Business Valuations Valuation Purpose Valuation Approaches
Income Approach Market Approach Asset Approach (cost)
Valuation Methods Discounted Cash Flow Capitalization of Earnings Market Comparables
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Valuation Purpose Liquidation Value Estate Planning Strategic Purchase/Sale Purchase/Sale Divorce Gifting/Tax Capital/loans
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STAGE 1
STAGE 2
STAGE 3
STAGE 4
STAGE 5
Four Critical Valuation Input Components
data inputs taken fromthe income statement,
balance sheet andmarket driven returnsbased on risk levels.
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Four Critical Valuation Input Components
STAGE 1
STAGE 2
STAGE 3
STAGE 4
STAGE 5
STAGE 2
Adjustments to Income StatementReflects true earnings power
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STAGE 3
Adjustments to Income StatementReflects true earnings power
Adjustments to Balance SheetReflects true asset/liability value
Four Critical Valuation Input Components
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Adjustments to Income StatementReflects true earnings power
Adjustments to Balance SheetReflects true asset/liability value
Calculate Discount RateApply accurate rate for present value
Four Critical Valuation Input Components
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STAGE 5
Adjustments to Income StatementReflects true earnings power
Adjustments to Balance SheetReflects true asset/liability value
Calculate Discount RateApply accurate rate for present value
Future Income MeasurementOwner’s Discretionary Cash
Four Critical Valuation Input Components
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Valuation - Adjustments1. Adjustments to the Income Statement
Cost of Goods Sold Operating Expenses Excess Compensation
2. Adjustments to the Balance Sheet Receivables/Inventory/Payables Other Assets/Liabilities
3. Other Adjustments Deliverable Working Capital Capital Expenditures
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Valuation - Adjustments
Adjustments to Income Statement & Balance Sheet
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Valuation - Adjustments
Adjustments to Income Statement & Balance Sheet
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Valuation - Adjustments
Adjustments to Income Statement & Balance Sheet
Excess Working Capital – a likely adjustment to the valuation.
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Valuation
Income Statement
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Valuation
Income Statement
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Valuation – Capitalization Rate
3. Discount Rate Investor’s return based on risk level
Capitalization Rate Discount rate less the growth rate
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Valuation – Capitalization Rate
3. Discount Rate Investor’s return based on risk level
Capitalization Rate Discount rate less the growth rate
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Valuation – Capitalization Rate
3. Discount Rate Investor’s return based on risk level
Capitalization Rate Discount rate less the growth rate
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Valuation – Capitalization Rate
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Valuation – Capitalization Rate
Questions like:Concentration of CustomersGrowth Rate of Primary MarketChanges in Market ShareCompetitiveness of Product or ServiceCyclicality of the Industry
… and many more
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Valuation – Capitalization Rate
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Valuation – Capitalization Rate
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Valuation – Capitalization Rate
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What score do you think yourbusiness would get, OR whatwould be the average score of
your clients?
Poll Question #2
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Valuation – Capitalization Rate
3. Discount Rate Investor’s return based on risk level
Capitalization Rate Discount rate less the growth rate
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Valuation – Capitalization Rate
3. Discount Rate Investor’s return based on risk level
Capitalization Rate Discount rate less the growth rate
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Valuation – Capitalization Rate
3. Discount Rate Investor’s return based on risk level
Capitalization Rate Discount rate less the growth rate
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Valuation – Discretionary Cash
4. Income Stream Measurement Earnings before tax EBITDA or EBIT EBITDA - Capex Free Cash Flow
Owners Discretionary CashEBITDA – Capex + WC Changes
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Valuation – Discretionary Cash
4. Income Stream Measurement
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Valuation Variables & Terms
1. Adjustments to Income Statement
2. Adjustment to Balance Sheet
3. Discount & Capitalization Rate
4. Estimate of future income
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Valuation–Discounted Cash Flow
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Valuation Methods
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Valuation Methods
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Valuation Methods
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Valuation Methods
Validation of Market Multiples
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Valuation Methods
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Valuation Methods
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Valuation Methods
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Valuation Methods
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Valuation Methods
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Which method do you thinkbest estimates FMV?
Poll Question #3
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Valuation – Weighted FMVWeighted methods based on the type of company
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Valuation – Weighted FMVWeighted methods based on the type of company
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Valuation – Weighted FMVWeighted methods based on the type of company
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Valuation – Weighted FMVWeighted methods based on the type of company
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Valuation – Weighted FMVWeighted methods based on the type of company
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Valuation – Weighted FMVWeighted methods based on the type of company
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Valuation – Weighted FMVWeighted methods based on the type of company
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Valuation – Weighted FMVWeighted methods based on the type of company
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Valuation – Weighted FMVWeighted methods based on the type of company
We value as on-going business – emphasis on selling multiples anddiscounted cash flow – no pure asset sale based method is used.
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Valuation – Weighted FMV
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Valuation – Weighted FMV
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Valuation – Weighted FMV
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Valuation – Weighted FMV
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Valuation – Weighted FMV
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What average rate of returndo you think most buyers
expect to achieve?
Poll Question #4
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Other Tools To Serve Your Business Clients?
Survey Says… 55% Top priorities are financial 49% Need help to accomplish priorities 44% Accounting Firm is having low or no impact 12% Plan to seek a new accounting firm
Source: What SMBs Want, Sleeter 2015
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Fiscal Checkup
Assist companies that want to optimize financialperformance
Empower Business Advisors who want to be acatalyst for that change
Provide a proven process to identify key financialparameters that have greatest potential impact
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Business Performance Review
Cost of Goods Sold Operating Expenses Capital Expenditures Margin Analysis Payroll as % of Sales Break Even Analysis 54 Financial Ratios Payables to COGS Profit per Employee
Accounts Receivable Accounts Payable Inventory Growth Rates Revenue per Employee Working Capital Mgmt Inventory to Sales Net Fixed Assets to Sales Margin on New Sales
Operating Expenses per Employee
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Business Performance Review
Discounted Cash Flow Capitalization of Earnings Multiple of EBITDA Multiple of Book Value Multiple of Earnings
… and a blended value that is validated
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Business Performance Review
Changeable Variables:1. Sales Growth Rate2. COGS as % of Sales3. Operating Expenses as % of Sales4. AR Days5. AP Days6. Inventory Days7. Capital Expenditures as % of Sales
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Business Performance Review
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Affordable: $495 list price Discounts & subscriptions available for Advisors
Grow Advisory Service Revenue Improve Client Retention Secure New Business Clients Differentiate the Services You Provide
www.FiscalCheckup.com
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Two Free ReportsFiscal Report Card 5 minutes AR, AP, Inventory Revenue, COGS,
Operating Expensesand Profit
Up to 5 NAICS Codes
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Two Free ReportsIndustry
Comparable Report Up to 5 NAICS Codes
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What will be yourtakeaways from this
webinar?
Poll Question #5
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Further info fromFiscal Checkup?
Poll Question #6
