Why Choose Capital Valuation Group?
For over 40 years Capital Valuation Group has specialized in helping owners of privately held companies in Wisconsin and across the United States resolve business valuation, ownership and transition issues. Watch our video to learn more.
An Introduction to Business Valuation
Understanding how a privately owned business is valued is not something we hear about or read about every day. This publication was written to help the layperson understand not only the key concepts behind the valuation of a business but what are the important drivers of value. So many want to believe a business is valued by applying some multiple to an earnings figure on the company’s income statement. Because that requires simply putting a couple of figures into a calculator. The problem is, the answer is only the solution to a mathematical equation, not the answer to the question, “what is the value of the business?” The successful valuation of an equity interest in a closely held business requires:
- Identifying the proposed use of the valuation conclusion
- Defining the term “value” based on the proposed use of the valuation conclusion
- Analyzing the business enterprise and its future business plan
- Pricing the business enterprise
- Analyzing the specific block of equity
- Pricing the specific block of equity
Capital Valuation Group PublicationsCapital Valuation Group has authored several publications and articles on the subjects of business and intangible assets valuation, succession planning, and litigation support. Some of our recent and most requested publications are available for download here. Case Law Update [PDF] 2016 edition Emshoff, R.
Historical Case StudiesCase Law Update January 2013 [PDF] >> Valuation Case Law Update [PDF]
Recent News and ArticlesCapital Valuation Group partners with leading business news sources and outside publishers to provide current articles relevant to business valuation and economic analysis. These articles are available for download here.
Articles:To Appraise or Not to Appraise, That is the Question. [PDF]
Source: Wisconsin Journal of Family Law (Reprinted with permission)
Frequently asked questions
I am selling my business and have already reached an agreed upon price with the buyer. Is there any reason to have a business valuation completed?
So my “friend” just sold her “service” business for “five times” earnings. Is this a universal benchmark and a simple way to establish a reasonable price for my own business?Back to top Back to top
Q: I am selling my business and have already reached an agreed upon price with the buyer. Is there any reason to have a business valuation completed?A: You have one opportunity to sell your business. Confirming that you are receiving an equitable price for the business can provide assurance and peace of mind. Also, if the buyer is looking for bank financing, most banks finance closely held business loans only if they can include the Small Business Administration’s (SBA) loan guarantee. To obtain this guarantee, the SBA requires that an independent business valuation be completed if the buyer is borrowing $350,000 or more. Our firm has worked with the SBA to develop a valuation product that meets their requirements while containing fees. Back to top
- The Asset Approach—typically provides a “floor value” for the business appraisal as it presumes that a prudent investor would pay no more/less for a business than its adjusted book value. This approach does not typically recognize or consider the future earning power of the business.
- The Income Approach—values the business based on the future economic benefit of the business attributable to a new buyer. It considers both the return on investment to the buyer as well as the inherent risk associated with that return.
- The Market Approach—values the business based on the comparison of the subject company to its peer group. This approach is based on the principle of substitution, assuming that a prudent investor would gravitate to the investment of lowest price if all other metrics and risk factors were the same.
- Fair market value – this is the most common standard and is defined as “the amount at which a property would change hands between a willing buyer and a willing seller, when neither is under compulsion to buy or sell and both have reasonable knowledge of all relevant facts.” It is also important to characterize the willing buyer in this definition. See Capital Valuation Group’s Prospect Ranking Chart for a ranking of potential buyers of a business based on willingness to pay more (or less) for an equity interest in a closely held business.
- Fair value – commonly used in situations such as dissenting shareholder actions, minority oppression cases, and dissolution actions. Fair value is defined differently depending on state statutes and accounting regulations, but typically refers to pro rata value, without discounts for lack of control and possibly without discounts for lack of marketability.
- Investment value – the value of an investment to a particular investor or class of investors, based on individual investment requirements and distinguished from fair market value, which is impersonal and detached. See Capital Valuation Group’s Prospect Ranking Chart (add link) for a ranking of potential buyers of a business based on willingness to pay more (or less) for an equity interest in a closely held business.
Q: So my “friend” just sold her “service” business for “five times” earnings. Is this a universal benchmark and a simple way to establish a reasonable price for my own business?A: No. Every closely held business is unique and has different risks and opportunities that need to be reflected in its value. Accounting, under Generally Accepted Accounting Principles (GAAP), was never intended to reflect value. Therefore, applying a multiple to some line on the financial statement is an exercise in math, but does not result in a meaningful indicator of value. To understand the value of a company we need to look at far more than the company’s financial statements. Here are just a few examples of the many things that should be considered when valuing a closely held business.
- Is this a transferable business or an individual’s career? See Capital Valuation Group’s discussion from An Introduction to Business Valuation.
- Is the business dependent on any one customer for a large percentage of its total revenues?
- Does the business’s future look different from its past (typically true of closely held businesses)? If so, how?
- Does the business intend to increase/decrease its workforce?
- Does the business have contracts with its customers?
- Does the business have contracts with its suppliers?
- What is the competitive environment for the company?
- Is there pending legislation that might affect value?
- Does the business have facility and equipment capacity for growth without significant additional capital investment?
- Does the business have an overreliance on one or more key executives?
- Is there a competent, ongoing management team in place?
- Are there unionized labor issues?
- Are there potential or known environmental issues?
- Are adjustments needed to “normalize” earnings?
- The purpose of the valuation
- The complexity of the project
- The quality of financial and other information
- The availability of documents and information
- The complexity and dispersion of ownership and equity rights
- The end product—if the valuation will be used for internal planning purposes a calculation report, which could be a summary letter (with supporting schedules attached) will suffice and fees can be contained. If the valuation will be used for tax filing (estate or gift tax) or for testifying in court, a fully documented, written report must be completed, and this is more expensive.
- Establish the purpose and parameters of the valuation
- Request documents and pertinent information about the business
- Review information received and analyze historical financial information
- Meet with owners/management to discuss historical trends and necessary normalizations for non-recurring or discretionary items, the future business plan and outlook, key risks and opportunities
- Research the current economic and industry trends
- Research our internal, as well as external, databases for mergers and acquisition data and/or guideline public companies
- Develop valuation model
- Determine the cost of equity and weighted average cost of capital to determine the present value of future economic benefits.
- Develop public company market analysis and comparable company transaction analysis as appropriate
- Reconcile the results of the various valuation methodologies and arrive at value for 100% of the business enterprise.
- Subtract debt to arrive at value for 100% of the equity
- Analyze the security (the specific block of equity being valued) for such factors as voting rights, preferential rights, transfer rights or restrictions. See Capital Valuation Group’s Block Ranking Chart (add link)
- Determine and apply appropriate premiums and/or discounts for control and marketability
- Review valuation methodologies and conclusions with client
- Report indications of value in appropriate written form
- If required, provide expert testimony to support our analysis and findings in deposition and/or trial.
- The company’s financial history and outlook
- Organizational and legal documents relating to the ownership of the company
- Prior transactions or valuations
- Legal agreements that affect operational control or enhance/restrict transferability
- The company’s facilities, suppliers, customers, employees, competitors
- The company’s intangible assets such as patents, copyrights, licenses, and customer lists
- Planned investment in capital expenditures
- Any contingent liabilities such as litigation and environmental issues