16,99 €
Mehr erfahren.
- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
Buying or selling a business? Acquire the tools and learn the methods for accurate business valuation Business valuation is the process of determining the value of a business enterprise or ownership interest. Business Valuation For Dummies covers valuation methods, including advice on analyzing historical performance, evaluating assets and income value, understanding a company's financial statements, forecasting performance; estimating the cost of capital; and cash flow methods of valuation. Written in plain English, this no-nonsense guide is filled with expert guidance that business owners, managers at all levels, investors, and students can use when determining the value of a business. It contains a solid framework for valuation, including advice on analyzing historical performance, evaluating assets and income value, understanding a company's financial statements, estimating the cost of capital, business valuation models, and how to apply those models to different types of businesses. Business Valuation For Dummies takes you step-by-step through the business valuation process, explaining the major methods in an easy-to-understand manner with real-world examples. Inside you'll discover: * The value of business valuation, including when it's necessary * The fundamental methods and approaches to business valuation * How to read a valuation report and financial statements * The other players in the valuation process * How to decide you're ready to sell -- and the best time to do so * The three stages of due diligence: the meet and greet; the hunting and gathering; the once-over * How to decide you're ready to buy -- and find the right business for you * What due diligence means on the buying side of things * When to call in the experts: divorce; estate planning and gifting; attracting investors and lenders This is an essential guide for anyone buying a business, selling a business, participating in a merger or acquisition, or evaluating for tax, loan, or credit purposes. Get your copy of Business Valuation For Dummies to get the information you need to successfully and accurately place a value on any business.
Sie lesen das E-Book in den Legimi-Apps auf:
Seitenzahl: 565
Veröffentlichungsjahr: 2009
Ähnliche
Business Valuation For Dummies®
Table of Contents
Introduction
About This Book
Conventions Used in This Book
What You’re Not to Read
Foolish Assumptions
How This Book Is Organized
Part I: What Business Valuation Means
Part II: Getting Familiar with Valuation Tools, Principles, and Resources
Part III: If You’re Selling a Business . . .
Part IV: If You’re Buying a Business . . .
Part V: Don’t Try This at Home! Turning Things Over to the Valuation Experts
Part VI: The Part of Tens
Icons Used in This Book
Where to Go from Here
Part I: What Business Valuation Means
Chapter 1: The Value of Understanding Business Valuation
Basic Tenets and the Importance of Valuation for Businesspeople
Value differs from price
Planning drives value
No two valuations are exactly alike
Valuation isn’t a one-time deal
The Basic Building Blocks for Calculating Value
Discount and capitalization rates: The numbers that really matter
Doing your homework: Due diligence
How rule of thumb enters into business valuation
Getting Expert Help
The Move toward Intangible Asset Valuation
Family Businesses: Important Valuation Targets
Chapter 2: What Triggers a Business Valuation?
Exploring Reasons for Wanting a Business
It’s time for a new career
You’re fulfilling a dream
You’re taking advantage of a strategic opportunity
You’re buying a business to pass on to your heirs
Shaking the Money Tree: How Lenders Make Thorough Valuation a Necessity
Borrowing to buy a business: What lenders want to see
Preparing for mergers and other big-money deals
Seeking new or continued funding for an existing business
Attracting public or private investors
What If You Want — or Need — to Sell a Business?
Doing some smart estate planning
Reaching retirement
Letting the kids take over
Facing threats from market forces
Separating from a co-founder or partner
Dealing with divorce
Exit Plans: Writing the Ending
Who benefits from an exit plan?
When should an exit valuation be done?
Chapter 3: Understanding the Tangibles and Intangibles of Business Valuation
Examining Your Reasons for Valuing This Business
Introducing Standards of Value
The mother of all standards: Fair market value
Perceptions of investment value
The fundamentals of intrinsic value
Going over going-concern value
Liquidation value
Adjusting or Normalizing a Financial Statement
Other Considerations: Science Meets Art
Adding business and economic news
Folding in tangible assets
Drawing valuation conclusions with intangible assets
Chapter 4: Approaches and Methods — Basic Theories of the Valuation Process
A Step-by-Step Overview of the Valuation Process
Risky Business: Gauging Circumstances for the Best Results
Understanding the different approaches
Calculating risk and its relationship to present value
Using discount and capitalization rates and income valuation methods
Chapter 5: The Challenge of Valuation in a Knowledge Economy
Moving from a Hard-Asset to an Intangible-Asset Economy
Reviewing types of assets
Recognizing the increasing value of intellectual property
Determining the Value of a Company Based on Ideas
The importance of real, documented income
What strategic buyers and lenders want to see
Reaching Intangible Value
Taking a stab at brand valuation
Recognizing customers as valuation drivers
Preserving Your Knowledge Business for the Future
Shaky times: When the founder’s brain leaves the building
What owners need to do: Planning ahead
Part II: Getting Familiar with Valuation Tools, Principles, and Resources
Chapter 6: Getting Familiar with a Typical Valuation Report
What a Valuation Report Is Supposed to Do
Outlining a Typical Valuation Report
Cover
Valuation summary
Valuation assignment
Economic outlook
Industry outlook
Business overview
Conclusion of value
Appendixes
Chapter 7: Meeting the Supporting Players in the Valuation Process
Getting Help in Valuing Your Business
Recognizing situations that call for valuation experts
Finding the experts you need
Seeking the qualities your experts should have
Appraising What Appraisers Do
How appraisers are trained and certified
What appraisers cost
How to examine a business appraiser’s work process
What to ask a prospective business appraiser
Taking Account of Accountants
How accountants are trained
How accountants are certified
What accountants cost
How to examine an accountant’s work process
What to ask a prospective accountant
Hiring Advocacy: Attorneys
How attorneys are trained and certified
What attorneys cost
How to examine an attorney’s work process
What to ask a prospective attorney
Brokers: One-Stop Valuation and Sale Services
How business brokers are trained and certified
What business brokers cost
How to examine a broker’s work process
What to ask a prospective business broker
Chapter 8: Understanding Financial Statements
Gathering the Financial Data You Need
Looking into Support Data
External data
Internal data
Taking a Look at Financial Statements
The balance sheet
The income statement
Statement of retained earnings
Cash-flow statement
Ratios and formulas for valuation
Chapter 9: Using Rule-of-Thumb Valuations for Mom-and-Pop Businesses
What Rules of Thumb Do in Business Valuation
2008 Rules of Thumb from the Business Reference Guide
Full-service restaurants
Bars
Gift shops
Medical practices
Auto repair shops
Day-care centers for children
Dry cleaning
Coin laundries
Bookstores
Bed-and-breakfasts
Part III: If You’re Selling a Business . . .
Chapter 10: Making Sure You’re Ready to Sell
Understanding Why Timing Is Important
Examining the Motivations behind a Potential Business Sale
Anticipating the owner’s retirement
The kids are taking over!
Weighing the possibility of a merger or acquisition from a friendly suitor
Changing market conditions are threatening a company’s future
Bringing Valuation into the Picture before You Bring In the Buyers
Providing a reality check
Transparency: Preparing for a sale
Heading off problems to increase value
Determining the Kind of Transaction You Want
Outright sale
Employee stock ownership plan (ESOP)
Ownership transfer to key family members
Chapter 11: Deciding What to Do about the Family Company
Planning for the Worst Possible Scenario
Examining the State of the Family Business
Specific characteristics of family companies
How families hurt the value of their businesses
Why “equal” in a family business isn’t always fair
Getting Your Family Down to Business
Following a phased-in approach
Addressing the fairness question head-on
Setting up the best plan for the generations
Chapter 12: Due Diligence on the Sell Side
Looking at Why a Seller Has to Do Due Diligence
Understanding the Three Stages of Due Diligence
Tricks of the Trade: Collecting and Exchanging Information
Gathering your own company data
Protecting your company with a confidentiality agreement
Chapter 13: Case Study: Valuation on the Sell Side
Heading Off Common Valuation Disasters
Writing down your wishes
Making sure that your records are adequate
Taking time to plan
Considering confidentiality
Setting Up Your Prevaluation Plan
Finding the problems
Analyzing the prevaluation
Performing the Valuation
Taking valuation from fantasy to reality
Checking the structure of the deal
Looking at an example of a deal in progress
Part IV: If You’re Buying a Business . . .
Chapter 14: How Do You Know Whether You’re Ready to Buy?
Knowing What Typically Drives a Business Purchase
Getting Ready to Buy
Tackling challenges unique to buyers
Looking at whether the business is right for you
Evaluating a failing business
Understanding how the mating process (typically) works
Restarting the Value Process
Chapter 15: Moving from Valuation to Negotiation
Knowing What Valuation Does for the Dealmaking Process
Identifying potential pitfalls and opportunities
Timing the purchase well
Minimizing emotional shocks
Getting Ready to Meet the Seller
Recognizing window dressing
Remembering motives
Knowing what sellers want
Let’s Make a Deal: Negotiating
Deciding whether to handle negotiations yourself
Getting ready to negotiate
Understanding what you should do in negotiation
Working with someone who’s negotiating for you
Chapter 16: Due Diligence on the Buy Side
Seeing What Due Diligence Means in Practice
Looking at the Unofficial First Stages of Due Diligence
Researching the company
Consulting your family and the pros
The Informational Game Plan: Cracking the Books (and the Internet)
Gathering the Company’s Data
Knowing which questions to ask about the target company
Checking with the company’s departments
Collecting Outside Data about Your Industry and the Economy
Chapter 17: Forensic Accounting and the Due Diligence Process
Understanding Forensic Accountants
Characterizing a qualified forensic accountant
Recognizing situations that link forensic accounting and valuation
Comparing Basic and Forensic Accounting
Recognizing Business Situations That Trigger Forensic Accounting
Doing a Forensic Accounting Test
Looking at Forensic Accounting Case Studies
Chapter 18: Case Study: Valuation on the Buy Side
Being Frank: Selecting an Industry
Doing Research in Advance
Contacting the Target
Negotiating the quick-and-dirty valuation stage
Knowing when to talk . . . and when to hang up
Moving on to Company Number Two
Seeing How Failing to Consult an Advisor Can Cost You
Knowing when to involve advisors
Encountering problems
Seeing what could’ve been done
Checking Benchmarking Data
Understanding Deal Structure
Part V: Don’t Try This at Home! Turning Things Over to the Valuation Experts
Chapter 19: Divorce
Doing Estate Planning Regardless of Marital Status
Planning Prenuptial and Postnuptial Agreements
Breaking down a prenuptial agreement
Creating a postnuptial agreement
Seeking the Correct Professionals
Looking at What Happens to a Family Business in Divorce
State laws on splitting property
The marital balance of power
Determining the Business Value in a Divorce
Keeping Valuation Dates in Mind
Chapter 20: Estate Planning and Gifting
Succession Planning: A Critical Part of Business Planning
Considering Family Matters
Anticipating problems
Considering blended and nontraditional families
Creating contingency plans for relatives who renege
Creating a Succession Plan
Creating an Estate Plan
Finding the Experts You Need for Estate Planning
Fitting Buy/Sell Agreements into Estate Planning and Valuation
Taking Gifting into Consideration
Gifting strategies
Gifting techniques
Chapter 21: Attracting Outside Investors to Your Startup
Exploring Your Startup Resources
Creating the Starting Point: The Business Plan
Working with Investors
Angel investors
Venture capitalists
IPO investors
Part VI: The Part of Tens
Chapter 22: Ten Reasons to Consider a Prenup
It Gets You to Talk Honestly about Money at the Start of a Marriage
Your Life’s Work Shouldn’t Go down the Drain
If Both Spouses Have Sacrificed to Build the Business, They Need to Share
The Working Spouse Shouldn’t Lose the Business Entirely
Kids from Earlier Marriages Need Protection
Kids from Your Next Marriage Need Protection, Too
Planning for Worst-Case Scenarios Is a Good Habit
Your Business and Personal Finances Really Are Connected
Family Legacies Need Protection
When a Marriage Ends, a Prenup (Or Postnup) Can Save You Both Money
Chapter 23: Ten Questions to Answer Before Considering a Partnership Agreement
Who Will Be in the Partnership?
How Much Capital Does Each Partner Have to Kick In at the Start?
How Will Decisions Be Made?
Do You Have a Plan for Resolving Disputes?
How Will the Firm Admit New Partners?
How and When Will Profits — or Losses — Be Shared?
What Happens If a Partner Leaves or Dies?
How Will the Partnership Be Sold or Dissolved?
How Will Legal Disputes inside and outside the Partnership Be Handled?
Will Noncompete Issues Be Covered?
Chapter 24: Ten Things to Consider Before Transforming Your Company Into an ESOP
Research How ESOPs Are Created
Understand Why ESOPs Are Attractive in Certain Situations
Know How the Tax Advantages Work
Examine How Valuation Comes In
Get a Handle on Your Launch Steps
Prepare for Preparation Costs
Get Ready to Train Next-Generation Leadership
Plan Ongoing Training for Employees
Estimate ESOP Costs after Launch
Realize That ESOPs Can Fail
Glossary
Business Valuation For Dummies®
by Lisa Holton and Jim Bates, MBA
Business Valuation For Dummies®
Published byWiley Publishing, Inc.111 River St.Hoboken, NJ 07030-5774www.wiley.com
Copyright © 2009 by Wiley Publishing, Inc., Indianapolis, Indiana
Published simultaneously in Canada
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-646-8600. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions.
Trademarks: Wiley, the Wiley Publishing logo, For Dummies, the Dummies Man logo, A Reference for the Rest of Us!, The Dummies Way, Dummies Daily, The Fun and Easy Way, Dummies.com, Making Everything Easier!, and related trade dress are trademarks or registered trademarks of John Wiley & Sons, Inc. and/or its affiliates in the United States and other countries, and may not be used without written permission. All other trademarks are the property of their respective owners. Wiley Publishing, Inc., is not associated with any product or vendor mentioned in this book.
Limit of Liability/Disclaimer of Warranty: The contents of this work are intended to further general scientific research, understanding, and discussion only and are not intended and should not be relied upon as recommending or promoting a specific method, diagnosis, or treatment by physicians for any particular patient. The publisher and the author make no representations or warranties with respect to the accuracy or completeness of the contents of this work and specifically disclaim all warranties, including without limitation any implied warranties of fitness for a particular purpose. In view of ongoing research, equipment modifications, changes in governmental regulations, and the constant flow of information relating to the use of medicines, equipment, and devices, the reader is urged to review and evaluate the information provided in the package insert or instructions for each medicine, equipment, or device for, among other things, any changes in the instructions or indication of usage and for added warnings and precautions. Readers should consult with a specialist where appropriate. The fact that an organization or Website is referred to in this work as a citation and/or a potential source of further information does not mean that the author or the publisher endorses the information the organization or Website may provide or recommendations it may make. Further, readers should be aware that Internet Websites listed in this work may have changed or disappeared between when this work was written and when it is read. No warranty may be created or extended by any promotional statements for this work. Neither the publisher nor the author shall be liable for any damages arising herefrom.
For general information on our other products and services, please contact our Customer Care Department within the U.S. at 877-762-2974, outside the U.S. at 317-572-3993, or fax 317-572-4002.
For technical support, please visit www.wiley.com/techsupport.
Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books.
Library of Congress Control Number: 2009925028
ISBN: 978-0-470-34401-9
Manufactured in the United States of America
10 9 8 7 6 5 4 3 2 1
About the Authors
Lisa Holton: Lisa Holton heads The Lisa Co., an Evanston, Illinois–based writing, editing, and video consulting firm founded in 1998. She is a former business editor and reporter for the Chicago Sun-Times and a former editor for Thomson Corp. She is a busy writer for corporations, associations, and universities nationwide.
Holton has 26 years of experience writing about business, workplace, education, and investment topics and has written or co-written 14 books. Her titles include For Members Only: A History and Guide to Chicago’s Oldest Private Clubs (Lake Claremont Press), The Everything Guide to Mortgages (Adams Media), How to Be a Value Investor (McGraw-Hill), The Essential Dictionary of Real Estate (Barnes & Noble Books), and The Encyclopedia of Financial Planning (FPA Press). She also ghostwrites books for corporate professionals.
In 2005, she became a contributing writer for the Financial Planning Association on consumer finance and retirement planning issues. She also writes on corporate governance and business planning issues for a variety of publications, including Corporate Board Member magazine.
Since starting her company, Holton has written for national magazines and newspapers including the American Bar Association’s ABA Journal, Parents, American Demographics, Latina, Working Mother, The Boston Globe, and the Chicago Tribune.
She is a graduate of Northwestern University’s Medill School of Journalism and a former national board member of the Society of American Business Editors and Writers (SABEW). She is a current member of the Authors Guild, the International Association of Business Communicators, and the Society of Midland Authors.
Jim Bates, MBA: Jim Bates is vice president, Transaction Support, for the Christman Group, a middle-market investment banking firm based in Palatine, Illinois. He ran his own business valuation company after managing the business valuation division of a national consulting firm.
Bates’s responsibilities include providing the managing directors of Christman’s regional offices with complete transaction support, including but not limited to preparing business valuations, writing offering memoranda, doing industry research, identifying and contacting buyers, and helping with virtually every other aspect of serving clients. He has been involved in more than 30 sell-side engagements and has prepared more than 500 business valuations.
In his spare time, Bates is a competitive tennis player at the national level and serves the Professional Tennis Registry as its representative for Illinois. Currently, he is five-time defending champion of the Midwest Hardcourt, 35 and over, doubles championship. He has been playing and/or coaching tennis competitively for more than 25 years and is certified by the Professional Tennis Registry at the highest of its three levels.
He holds a bachelor of business/economics degree and an MBA with concentrations in finance and marketing from Western Illinois University.
Acknowledgments
Many of the people who contribute to the process of writing a book are unsung, so we’ll do the singing here.
We’d like to start by thanking Tom West of the Wilmington, North Carolina–based Business Brokerage Press for graciously allowing us to reprint excerpts from his rule-of-thumb industry bible, the Business Reference Guide.
Darrell Dorrell of Lake Oswego, Oregon–based Financial Forensics was a font of information on the forensic accounting field and a great storyteller regarding the criminal side of valuation and finance. Justin Cherfoli, managing director of the Dispute Advisory and Forensic Services Group of the Chicago-based financial advisory firm, Stout Risius Ross, provided great guidance and harrowing commentary on what some families go through in the valuation process.
Above all, Mike Adhikari of Business ValueXpress and the Kellogg School of Management at Northwestern University was a great conduit to basic valuation knowledge and many of the sources within this book.
We couldn’t have done this book without substantial help and support on the For Dummies side of the street. Natalie Harris, Chrissy Guthrie, and Stacy Kennedy worked tireless hours to make this book a reality.
Lisa would also like to thank her agent, Marilyn Allen of the Allen O’Shea Literary Agency in Stamford, Connecticut.
Jim would like to thank his family: Brad Bates, Mary Ann Bates, Mary Agnes Bates, and Meredith Spiering. Without their love and support, his career would not have been possible. In addition, he would like to thank his colleagues at the Christman Group: Pete Christman, Rich Jackim, Jack Emmons, and Anneke Chamy. Their feedback, experience, and friendship are invaluable.
Publisher’s Acknowledgments
We’re proud of this book; please send us your comments through our online registration form located at http://dummies.custhelp.com. For other comments, please contact our Customer Care Department within the U.S. at 877-762-2974, outside the U.S. at 317-572-3993, or fax 317-572-4002.
Some of the people who helped bring this book to market include the following:
Acquisitions, Editorial, and Media Development
Project Editor: Natalie Faye Harris
Acquisitions Editor: Stacy Kennedy
Copy Editors: Sarah Faulkner, Krista Hansing, Kathy Simpson
Assistant Editor: Erin Calligan Mooney
Editorial Program Coordinator: Joe Niesen
Technical Editor: Anneke Chamy
Editorial Manager: Christine Meloy Beck
Editorial Assistants: Jennette ElNaggar, David Lutton
Cover Photos: © David Muir
Cartoons: Rich Tennant (www.the5thwave.com)
Composition Services
Project Coordinator: Katherine Key
Layout and Graphics: Reuben W. Davis, Christin Swinford, Christine Williams
Proofreaders: Amanda Graham, Bonnie Mikkelson
Indexer: Infodex Indexing Services
Special Help: Christina Guthrie, Danielle Voirol, Amanda M. Gillum
Publishing and Editorial for Consumer Dummies
Diane Graves Steele, Vice President and Publisher, Consumer Dummies
Kristin Ferguson-Wagstaffe, Product Development Director, Consumer Dummies
Ensley Eikenburg, Associate Publisher, Travel
Kelly Regan, Editorial Director, Travel
Publishing for Technology Dummies
Andy Cummings, Vice President and Publisher, Dummies Technology/General User
Composition Services
Gerry Fahey, Vice President of Production Services
Debbie Stailey, Director of Composition Services
Introduction
No two businesses are exactly alike — even those that are part of a national chain with exactly the same sign on every door. Each business or outlet of a business has its own complexities that determine whether it’s worth a little . . . or a lot.
That’s why business valuation is actually a pretty complex affair for someone who’s never taken a finance class. If you go online or into a bookstore looking for books on business valuation, you’re likely to find volumes that are written more for people who’ve already been exposed to business finance, accounting, or management training. If you’re considering buying a business or have operated one for years without a lot of that training, we’re pretty sure that a complicated textbook isn’t what you need.
We think that valuation should be the first thing you think about before you make a move into or out of any business. Consider this book to be a starting point for a bright, well-informed future in buying or selling a business, because the dream of owning or selling a business should always begin with dedication to understanding the true value of what you’re buying. If we can give you an understanding of the basics of business valuation and of the tools and expertise you require to get the right valuation for the job, we’ll have accomplished our purpose.
About This Book
This book is very cautious because we think it should be.
We’ll state this upfront: This book will notmake you qualified to handle most business valuation tasks by yourself. Nor will you have a complete background in business accounting or business law when you get to the last page. The purpose of Business Valuation For Dummies is to give you an overview of all the critical skills, issues, and methods involved in small-business valuation without taking you through all the detailed theories and number crunching necessary to the process. Other, more-advanced resources are out there to show you those processes when you’re ready. But by the time you’re done with this book, you’ll know which basic processes, resources, experts, and tools you need so you can put together the fairest and most affordable valuation solution for the business in question.
We tell you what various professionals do in the valuation process, but we don’t tell you that you can do their job. We also tell you the many steps you can follow to educate yourself about valuation in general and your target business in particular, as well as how to make the right decisions to get an accurate valuation of a business. For instance, you can consult resources, free or nearly free of charge, to build a baseline of the business you’re considering and then move on to the basics of valuing that kind of company. We tell you about those resources in this book, discussing rule-of-thumb valuation and other resources you can consult early in the process to start building knowledge. We encourage you to do this basic research before you even think about buying or selling a company. (And yes, even if you’ve owned a business for decades, you need to do this research before you sell!)
If we’ve done our job, this book will give you a thorough summary of all the steps in effective valuation and show you how to plan and execute that process. We give only two detailed examples of valuation in this book: one for the sale of a business and the other for a purchase. This way, you get a close-up look at how an isolated example works, which we think makes a lot more sense than attempting to generalize for every possible situation, which might mislead you.
This book adopts a holistic approach that involves expertise not only for business valuation but also for your personal and family finances. Why? The decision to buy or sell a business is a major life step; it’s not just about the business. Ownership is tied to one’s personal finances and family goals, and business valuation needs to tie into all those things. Even if you have a small business and a small family, getting advice tailored specifically to your circumstances is usually smart.
Last thing: Because one of the authors of this book is a valuation professional, you may say, “Oh, that’s why they keep saying to use an expert.” Keep in mind that we don’t say which experts you need to use; you have a choice. But anyone who wants to be in business needs to know that tax, valuation, legal, and finance issues are interconnected, and you need people with excellent skills helping you manage these subjects if you don’t have the expertise yourself.
Conventions Used in This Book
When this book was printed, some Web addresses — which appear in monofont — may have needed to break across two lines of text. If that happened, rest assured that we haven’t put in any extra characters (such as hyphens) to indicate the break. When you use one of these Web addresses, just type exactly what you see in this book, pretending that the line break doesn’t exist.
We use italics to highlight new terms, and we follow them up with easy-to-understand definitions.
What You’re Not to Read
If you want to lighten your reading load or just simplify your understanding of the concepts, take a pass on any text preceded by the Technical Stuff icon. Also, although we encourage you to check the chapters that have a significant amount of formulas and math in them (which we haven’t overdone, by the way), you may want to take a break on those or just save them for last. Finally, you can skip the sidebars — gray boxes containing related but nonessential text — if you want to get straight to the good stuff.
Foolish Assumptions
This book is designed for two kinds of people: those who are thinking about buying a business and those who are considering selling one. We consider this book to be optimal for people who want to go into business for themselves for the first time, because it addresses the critical knowledge that all good businesspeople have: the ability to maximize value at all times. Yet if you’re planning to sell a business, we provide a planning outline to allow you to maximize the value of your business before the for-sale sign goes out front.
Here are a few assumptions we make about you, the reader, whether you want to buy or sell:
You’re probably looking at a company of less (sometimes significantly less) than $5 million in annual revenues. This book focuses mainly on the purchase and sale of private companies — that is, companies that don’t trade daily on a major exchange.
You have some experience with the business world. However, we don’t assume that you have a background in finance or valuation, which are frankly two different and very complex disciplines.
More than anything, we assume that you don’t want to be taken to the cleaners on your first foray into business or your last decision with the business you own. Perhaps you’ve watched other people go into business, and you just know that they don’t have any idea what their business is truly worth; they’ve negotiated up or down with a seller, but they haven’t fully kicked the tires. That move isn’t the kind you want to make. You realize you need industry, financial, and operational knowledge to make the best decision.
How This Book Is Organized
Like all other For Dummies books, this book is divided into parts, and each part is divided into chapters. What follows is a summary of what you can see in each part of the book.
Part I: What Business Valuation Means
We start by telling you what business valuation is and why we think it’s the first thing you should understand about being in business. We talk about why valuation is such a challenge, and we give you the basic accounting approaches that experts take to uncover value — or the lack of it — in an organization. Last, we talk about the greatest valuation challenge today: how experts evaluate what intellectual property means to an organization.
Part II: Getting Familiar with Valuation Tools, Principles, and Resources
This part is where we spend the most time talking about paperwork, process, and expertise. We talk about what a valuation report looks like and what various professionals do in the valuation process; we offer a primer on financial statements and how they’re used in the valuation process. We also offer an important chapter that talks about rule-of-thumb valuation information — where it can help and where it can mislead.
Part III: If You’re Selling a Business . . .
People sell businesses for lots of reasons. They’re sick of running the business, for example; or they’ve made the business a rousing success that’s ripe for a nice price from a new owner; or they’re ready to retire or to pass on what they’ve built to the next generation. The reasons can vary, but one thing is clear: Planning for the sale of a business is something that you don’t do just a few months in advance. The planning takes years and is best thought of as part of a founder’s overall estate strategy. If you build a business, you want to get the best value for it in a way that allows you to enjoy the full rewards of what you created.
So if you’re trying to figure out what to do with a family-owned company, this part is for you. Family businesses supply an incredible amount of drama in the valuation process. This part also introduces a detailed case study on the sale of a fictional business.
Part IV: If You’re Buying a Business . . .
Knowing about basic valuation issues is the key to making a deal. Buyers have to do their own planning for a transaction because they may be going into business for the first time or buying another company in a series of companies to complement existing business interests. And of course, buyers have their own succession and estate-planning issues to deal with. In this part, we discuss valuation issues for the buyer and feature another major detailed case study, this one on the purchase of a particular fictional business.
Part V: Don’t Try This at Home! Turning Things Over to the Valuation Experts
The purpose of this part is not to win business for valuation experts, even though we clearly believe that these chapters cover situations in which you need help. The idea is to communicate why the complexity of certain valuation situations should encourage you to seek help.
This part includes three chapters that discuss situations in which business owners definitely shouldn’t go it alone. Which situations did we choose? Divorce certainly qualifies because it endangers many family companies. Estate planning and gifting are tied in with the value of the family business; therefore, they need joint coordination. Finally, people need valuation advice when they’re preparing to attract outside investors to a business.
Part VI: The Part of Tens
These three chapters offer ten points of interest each on the following topics: reasons to consider a prenuptial agreement, elements to build into a partnership agreement, and things to consider before transforming a conventional business to an employee stock ownership plan (ESOP).
Icons Used in This Book
This book uses the following icons to highlight key information.
This icon calls your attention to particularly important points and offers useful advice on practical financial topics. This icon saves you the cost of a yellow highlighter pen.
This icon serves as a friendly reminder that the topic at hand is important enough for you to put a note about it in the front of your wallet. The icon marks material that a college professor would put on the board before class starts, noting the important points that students should retain at the end.
This icon warns you about speed bumps and potholes on the valuation highway. Taking special note of this material can help you steer around a financial road hazard and keep you from blowing a fiscal tire. In short — watch out!
This icon marks nonessential information, such as statistics and history lessons. The ideas here are interesting, but you can skip this text if you want to get back to the basics.
Where to Go from Here
We really enjoyed writing this book. We particularly like the idea that we can get small-business people thinking about the importance of valuation early in the life of a business.
If you know nothing about the business valuation process, we suggest you start with Part I. But this is a reference book, so feel free to jump around a bit. For example, you can see how specific situations are handled in Part V, and if you want to see detailed case studies on valuations, by all means, head to Chapters 13 and 18.
Part I
What Business Valuation Means
In this part . . .
Many people think that business valuation is all about getting to a price for a business, and that’s certainly a big part of it. But we think that valuation is the central concept of what makes a business a business — and that very few people really understand it. In this part, we discuss the reasons valuation happens in a business, and we introduce the accounting concepts in the process. Most importantly, we discuss valuing business ideas.
Chapter 1
The Value of Understanding Business Valuation
In This Chapter
Why the price of a business is only half the story
The importance of planning in valuation
Basic due diligence
Why families are so important in the process
You’re here for one of two big reasons: You have a business that you want to sell, or you want to buy a business. Very likely, the business in question is a small business (with less than $3 million in annual sales), and it may be the first and only business you ever own.
Before we go further, we want to pay you a compliment. Right now, you’re doing something that painfully few entrepreneurs do: thinking about what a company is actually worth before you make a major decision or take a major action. You’re already ahead of the game. And because you’re reading this book, you obviously know that business valuation is an important part of that game.
Business Valuation For Dummies is for people who want to understand value. This book can help you get your arms around the many tasks and variables involved in effective valuation of a company and help you decide what kind of help you should enlist to complete a deal. In this chapter, we discuss the importance of valuation, talk about doing research and calculating value, and include some notes on valuation experts and intellectual property. We wrap up with a discussion of passing a family business from one generation to the next.
Basic Tenets and the Importance of Valuation for Businesspeople
Everything has a value. Putting value in dollar terms is the cornerstone not only of running a business but also of investing in almost any form. Knowing how to arrive at a value for the physical and intrinsic characteristics of a business is essential to building wealth of all kinds.
To that end, people who invest in companies need to look beyond the current state of the business they own (or want to own) and consider what decisions they need to make to boost value. People who have experience in those industries are often best equipped to make those decisions, but it often helps to engage a business valuation expert for guidance. In this section, we discuss the concept of value and note some of the main principles of business valuation.
Value differs from price
As the celebrated investor Warren Buffett once said, “Price is what you pay. Value is what you get.” We would add one more line: “If you do your homework.”
In business deals, most buyers and sellers have a singular focus on price — and price is hard to avoid. Negotiations ideally produce numbers that both sides can be happy with. But getting to the right price in any deal involves understanding what business assets are truly worth and then structuring a deal around financing and tax realities, which can be quite surprising to those who fail to plan.
Planning drives value
Creating value is a transformative topic in business planning and execution. If you’re creating a product, granted, that product is the focus of the business for customers and your employees. Creating value — long-term growth in asset value in a company you’ve built — is something you need to focus on, because a company is the sum of real and tangible assets, investments, ideas, and management talent.
If you can look at all those working parts of a business through the prism of value, the desire to determine and create value in a company can become a much more important driving force in its growth than simple profits and losses.
Proper valuation takes time. People buy and sell businesses for a variety of reasons that aren’t all about business. For instance, they may make moves in and out of companies based on career goals. Others devote a lifetime to a business so they can finance their retirement or simply pass the business on to their kids as a legacy. All these motivations drive valuation and should require three to five years to account for owners’ estate, succession, and exit planning. We talk about the importance of planning throughout this book.
One of the best places to start finding out about the planning process for starting a business is the U.S. Small Business Administration’s Web site (www.sba.gov).
No two valuations are exactly alike
No two businesses are exactly alike; neither are the goals and circumstances of business owners. You may be in any of a variety of situations, such as the following:
You may be the child of a company founder, wondering whether you want to take over the company when she retires.
You may be a corporate executive who’s ready to start a new career with a new business purchased with a cash buyout.
You may be a worried sibling trying to figure out what to do with the family company because the company’s founder, your father, has died suddenly.
Valuation isn’t an exact science for another reason as well: The risk inherent in any business situation is far from static. Depending on the economy and the state of the industry the business operates in, the company may be under tremendous pressure to stay afloat, or it may have great opportunities for growth. Any time the economy goes through a major convulsion, people take a fresh look at what value means and at the realities of any deal. As we write this book, the nation is in the grip of a worldwide credit crisis — an economic slowdown that is redefining the values of a host of assets, from companies to private homes.
All these variables are one reason you won’t emerge from this book with the skills to do a top-to-bottom business valuation. Also, proper business valuation takes a lot of practice. People with finance degrees and long experience in accounting or other numbers-related fields aren’t always naturals at valuation, either. Don’t worry, though. This book does cover the ins and outs of business valuation and points out the areas in which you can handle valuation on your own — and those for which you should hire some help.
Valuation isn’t a one-time deal
If you’re already operating a business to its fullest potential, valuation isn’t something you should put off until you’re ready to sell or close your doors. Most tax, business, and personal finance experts say that even if you’re years away from retirement — or years away from your next business idea — keeping your valuation numbers current is a good idea. This way, you can make changes and investments in the business so you can leave the business with the highest valuation possible.
A strategy of continual valuation tells you the following things:
Whether selling your business or merging with another makes sense
Whether you can make enough money from the sale of a business to support your retirement
When you want to set a timetable for your kids or other family members to take over the business
The optimal time to set up an employee stock ownership plan (ESOP) as a way to pull money out of the business in a tax-advantaged way
How often should you run valuation numbers? Frankly, it varies based on need. With computerization, it’s easy for many businesses to program their numbers so they can keep a constant eye on their main value indicators that have been developed for any goal they have on their radar.
If you’re working with a business or tax planner, discuss the creation of a valuation system for your business, whether it’s something you access yourself or have an expert handle at regular intervals.
Seeing what the finished product looks like is a good starting point, so flip to Chapter 6 for a description of a typical valuation report.
The Basic Building Blocks for Calculating Value
The three top associations for valuation professionals are the American Society of Appraisers (ASA), the Institute of Business Appraisers (IBA), and the National Association of Certified Valuation Analysts (NACVA). These organizations agree on three major approaches to business valuation:
The asset approach: Also known as the cost approach, this valuation approach is based on finding the fair market value of assets (the easiest ones to value are tangible assets) and deducting the liabilities to determine the net asset value or the net worth of the business.
The market approach: This approach compares your company or a target company with similar companies. You can use comparisons to publicly traded companies or actual sales transactions for similar businesses. These valuations are frequently expressed in ratio form.
The income approach: This approach focuses on the future economic benefits you’re anticipating from a business — better known as income. This amount is expressed in today’s dollars, and is also known as present value.
For more information on these three approaches, see Chapter 4. In this section, we discuss some of the basic ideas that go into calculating value.
Discount and capitalization rates: The numbers that really matter
Most of the number crunching that goes into valuation doesn’t take on real meaning until appropriate discount and capitalization rates are assigned to the valuation itself. These computations allow valuation to become much more meaningful in light of the business the company is in and the various attributes to its industry. We discuss these concepts in Chapter 6.
Doing your homework: Due diligence
The term due diligence means investigating a company with the cold eye that you should bring to any investment. For anyone doing the job, due diligence involves reading everything, asking plenty of questions inside and outside an organization, and generally leaving no stone unturned in finding out what makes a company tick and how much it’s truly worth.
Due diligence involves not only basic research and calculations, but also the ability to forecast how a company will do years from now.
Whether you’re a buyer (see Chapter 16) or a seller (see Chapter 12) — whether or not you’re enlisting help with a transaction — due diligence starts with your intentions toward any company. Both soft and hard skills are involved in valuing a business correctly, and in the chapters in Part I, we talk a great deal about the early stages of company research and what you can do to inform yourself about the worth of the business, even if you’ve never been in business before.
How rule of thumb enters into business valuation
Rule of thumb is a starting point for civilians in valuation — a way to get a general idea of what companies in certain industries are worth. The rest, you have to investigate thoroughly on your own and with the right help. But here are some key points concerning what you’re about to see.
Tom West is a founder, past president, and former executive director of the International Business Brokers Association (IBBA). For the past 18 years, he’s been the author of The Business Reference Guide, an annual bible on pricing for hundreds of categories of independent businesses and name-brand franchises. In Chapter 9, we feature rule-of-thumb guidance for ten kinds of businesses from data West has compiled for the BRG and listings on his subscription Web site, Business Brokerage Press (www.bbpinc.com).
In West’s guide, rule-of-thumb guidance comes in two formats that most valuation experts recognize:
Percentage of annual sales: If a business had total sales of $100,000 last year and the multiple for that business was 40 percent of annual sales, the price based on that particular rule of thumb would be $40,000.
Multiple of earnings: An earnings multiplier makes the most sense to prospective buyers. It directly addresses the buyer’s motive to make money: to achieve a return on investment.
In many small companies, this multiple is commonly used against what is known as seller’s discretionary earnings (SDE), which are earnings before accounting for the following items:
• Income taxes
• Nonrecurring income and expenses
• Nonoperating income and expenses
• Depreciating an amortization
• Interest expense or income
• Owner’s total compensation for one owner/operator after adjusting the total compensation of all owners to market value
Chapter 9 gives you more details on how rule-of-thumb guidance applies in specific business situations.
Getting Expert Help
The authors of this book share a very precise bias: We believe that no one should attempt this process alone unless he or she has been trained and licensed to value companies, plain and simple. It’s a very good idea to enlist help wherever you’re in the valuation process. Valuation experts can help a business owner locate key benchmark data and other information that shows the worth of companies demonstrating the best practices and best performance in an industry.
Valuation experts (the best ones, anyway) aren’t generalists. They do have general skills in finance that allow them to make mathematical calculations — known as tests — that are relevant to finding what particular assets are worth. But certain valuation professionals specialize in specific industries and deals. Some work with manufacturing assets, for example, whereas others work with intellectual property; others handle mergers and acquisitions for companies of a particular size.
The various experts in the valuation process include the following:
Appraisers and valuation experts
Accountants and forensic accountants
Attorneys
Business brokers
We provide a few case studies in this book (especially in Chapters 13 and 18) that illustrate what we believe to be true: Owners lie (intentionally or unintentionally) about their results, and not every business owner is equipped to see through such obfuscation. Even in fairly small deals, much opportunity exists for assets to be overvalued or hidden.
Plenty of business owners resist getting help with valuation because that help costs money. But unless you have significant experience in business or in valuation finance, getting someone who can help you confirm that the asset value of that business is real is a good idea. We encourage you to ask people who work in business valuation plenty of questions, because you need to know that these people understand what you need to value and for what purpose.
You can find detailed books on business negotiation, but unless you can match valuation knowledge with the process of negotiating for the business itself, you may not be fully prepared to make or receive an offer by yourself. In Chapters 13 and 18, we offer case studies that show how buyers and sellers go through the process of valuation. In Chapter 18, we also talk about how mistakes in valuation can damage a deal.
The Move toward Intangible Asset Valuation
Perhaps the greatest philosophical debate going on in the valuation industry is how to place a value on companies that derive most of their asset value from intellectual property. We talk about that debate in some depth in Chapter 5.
Some people argue that old formulas and approaches to valuation have been blown out of the water by the transition to a world that’s overrun by Internet-driven companies that outsource much of the production of things you can touch. We don’t. Our position is that whether a company’s most valuable assets are sitting on the shop floor or inside the minds of some really smart people, those assets need to produce one thing to prove value: profit.
Today, as before, the central identity of an asset is its capability to generate a return. Yet businesses that deal in intellectual property — everything from old-line medical practices to cutting-edge software — need to keep their eye on the production of real earnings.
Family Businesses: Important Valuation Targets
We spend a lot of time throughout this book talking about families because they control the lion’s share of business wealth in the U.S.
In 2004, Insurance Journal estimated that approximately $40.6 trillion will change hands by 2052, as Baby Boomers pass their accumulated assets on to their heirs. A portion of that wealth transfer will be due to the deaths or retirements of the owners of closely held or family businesses. Yet according to a 2006 report in Business Week, the oldest Boomers aren’t so willing to die in the saddle. Many owners in their 50s and 60s are willing to move aside after they’ve made enough money to retire and possibly start new careers.
Many founders or previous-generation leaders are seeing retirement as a chance for new possibilities, so they’re willing to get out of the way of the next generation. But are they willing to plan for the smooth transition to the next generation, with clear leadership roles defined and wealth-management issues settled before they go? Not so much. According to a 2003 Raymond Institute/MassMutual survey, 19 percent of family-business participants hadn’t completed any estate planning other than writing a will, and only 37 percent had written a strategic plan for their companies.
Working with family members from the time they’re young to gauge their interest and involvement in the business will be crucial to valuation later on. Enthusiastic and talented employees who just happen to be relatives tend to be much more dedicated to growing the company than those who use the family business as a fallback employer. Family members who know where they stand as participants or nonparticipants in the family business are likelier to pull together and do what’s best for the business as transitions occur.
Chapter 2
What Triggers a Business Valuation?
In This Chapter
Looking at reasons for buying a business and what they may mean for you
Getting a valuation to appeal to lenders and investors
Knowing what your company is worth before it changes hands
Setting up an exit plan
Business valuation is about as dry a term as you find in finance (admit it — didn’t your eyelids flutter a little when you read this book’s title?). But when you start looking at the reasons people want to value a business, things start to get sexy.
The motivations behind getting a valuation right go beyond finding out whether a mom-and-pop store is worth what Mom and Pop really say it is. Most business valuation efforts are tied to finding a number that describes wealth, no question. But dig a little deeper, and you find some very real emotion behind the process: One person wants to realize his dream of owning a business. Another realizes her dream is failing (or maybe her creditors are trying to convince her that it is). A longtime family company finally runs out of heirs willing to take over, and it’s time for the business to be sold or split up. A husband and wife divorce, and both want their fair share.
Yet business valuation isn’t an idea only for existing companies. It’s also an important concept in buying a new company or developing a business idea. Why? Because if a business doesn’t produce value for customers, suppliers, and owners on a day-to-day basis, it’s just not a business. This chapter discusses the concept of value as a starting pointfor anyone who wants to buy an existing business or start a new one. It also covers valuation for when you seek a loan to support an existing business or for when you need to sell or pass the company on to someone else.
Exploring Reasons for Wanting a Business
Many people start or buy their business with money they have in their pockets (or more realistically, a sizable bank account) or money they get from others. The money from others may be in the form of loans, gifts, or cash exchanged for partial ownership in their new company. The money in their pockets may be from savings, an inheritance, or possibly a company buyout.
No matter where the funds come from, knowing the unbiased value of a business concept is critical. You may think that your business is worth a lot or that the business you want to buy or start is great. But if people with money to offer don’t see what you do, how much is it really worth?
The first step in valuation is determining the motivation for the valuation. In the following sections, you can find some prime motivations for valuation that you’ll likely find familiar.
It’s time for a new career
Whether facing a bad economy, a bad boss, or an early buyout, plenty of people think about self-employment. According to 2005 figures from the Ewing Marion Kauffman Foundation, approximately 10 percent of the U.S. workforce is employed in businesses they own, and 0.29 percent of the total adult population starts new businesses each month.
Unquestionably, new businesses provide new jobs. But how secure are those jobs? Valuation is one way to determine the level of risk one undertakes in buying, selling, or starting up a company.
And how many new entrepreneurs do a professional, detailed valuation of a target before they take this chance? Well, no firm figures exist, but it’s a safe bet that the answer is “not enough.” According to the U.S. Small Business Administration in 2005, two-thirds of new employer establishments survive at least two years, and 44 percent survive at least four years — and the numbers fall from there.
The role of valuation in a career context isn’t one-dimensional. You’re not just talking about valuing a company so you’ll have someplace to go every day. You want to know whether this company can provide a steadily increasing income stream that will not only keep your personal finances ahead of inflation but also give you and your family financial security in the short term and the possibility of a legacy in the long term.
Are you ready to be in business?
If you’ve never had the experience of owning a business, the first questions to ask have nothing to do with valuation. Consider this list of questions to ask yourself if you’ve never operated an independent business:
Question
Yes
No
Are you an organizer? A self-starter?
Can you tolerate a variety of personalities?
Can you make solid decisions quickly?
Are you in good health?
Do you understand business finance?
Can you work 10- to 12-hour days with no weekends?
Have you discussed all the challenges of owning a business with your family?
Have you created a business plan?
Will you have to borrow money?
Will you have investors in the business?
Do you really believe in your ideas?
Have you ever hired anyone?
Have you ever talked to anyone in this industry?
Have you thought about where you’ll locate the business?
Answering yes to these questions is important because they’re true indicators of how prepared you are to build a company. If you find that you’re answering no to more than a few, that doesn’t mean you shouldn’t start a business, but maybe you need to wait or refine your idea.
If you’re seeking a career change, it’s not enough that a business works well enough to keep the lights on, support its employees, and stay competitive in the marketplace; it has to support you from a financial standpoint and engage you from a career standpoint. You’re not just valuing a business; you’re valuing a career and a financial future. Can you see yourself working many hours in this field and guiding the business through good times and bad? Can you see it building you a better life at home? A thorough valuation process answers those questions, too.
You’re fulfilling a dream
When your business plans are tied up with fulfilling a dream, valuation gets emotional — and therefore a bit dangerous. Absolutely nothing is wrong with having a dream of owning a business, as long as it comes with a solid plan to determine the value of its assets. And to get to a solid plan, you must have respect for solid valuation techniques.
Plenty of entrepreneurs successfully incorporate raw emotion and their dreams into the purchases and startups of new businesses. For instance, the lore goes that Jeff Bezos, founder of Amazon.com, got the idea to start Amazon on a cross-country drive between New York and Seattle after he quit a Wall Street job as a computer geek. Within days, Amazon was taking baby steps in his garage. And Sir Richard Branson, founder of the Virgin brand of more than 360 companies, started a teen magazine at age 16 that eventually morphed into his first mail-order music business, and the Virgin name is now on everything from airplanes to alternative fuels.
Entrepreneurial stories — particularly the success stories you hear over and over — are inspirational. But they don’t take the place of cold, hard valuation techniques in the process of starting up a new business idea or buying an existing company. Valuation techniques are used to evaluate and quantify the following three basic elements, which determine the value of a going business:
Cash flow: The cash that a business is expected to generate, and continue to generate, into the future
Growth: The growth expectation of the cash-flow stream we mention in the preceding bullet
Risk: The risk inherent in maintaining or growing the cash generated by the business
You’re taking advantage of a strategic opportunity
It’s great when opportunity knocks, but how do you know it’s really a strategic opportunity for you and your business? Whether you’re talking about buying a small company or a large one, the valuation process is necessary to determine whether the current owner’s sales pitch conforms to the actual value of the business or whether the prospective buyer is representing himself accurately.
That’s why when companies merge, both parties request a valuation assessment of the other. And in many cases, they may already have conducted such a process on themselves. When both sides get to serious talks, they bring in valuation professionals and, in some cases, forensic accountants (see Chapter 17) to begin a detailed examination of all of a company’s assets.
Skipping out on the strategy
Before you act on your dream of owning or starting a business, you need to dedicate yourself to a valuation strategy. After all, the financial future you save may be your own.
One particular gentleman accumulated a nice nest egg working in corporate America and decided to purchase a business. It was a rather small business (with roughly $500,000 in gross revenue) that had been around for years. Through the seller’s intermediary, the man submitted a professionally written offering memo. An accountant was the primary reviewer of the financial statements. He didn’t bring in a specific expert on valuation.
The gentleman made an offer, and the purchase and sale agreement and other documentation began. However, he performed no physical inventory audit. He didn’t spot-check the customer list. He didn’t scrutinize the owner’s add-back adjustments.
