Small Business Valuation and Appraisals, Free course: How to Value Your Own Business.

QUESTIONS FOR BUSINESS VALUTION ESTIMATE

Answer the following questions and we will email you an estimate of the cost for a Preminary Business Appraisal of your company. These questions are fairly long to make our estimate as accurate as possible. However, the estimate we provide from this questionnaire is not a firm quote. Every question must be answered.

We reserve the right to change our estimate depending on additional information received in the future. Note, under some circumstances such as larger, more complex valuations, we may decline to email you an estimate without consulting with you first.

We assume here a valuation date is at the end of a fiscal year, i.e. no attempt to refining a value to a mid-year date. For most purposes, including most tax situations, this is adequate. We can, of course, separately provide you a quote for a mid-year valuation date.

1. BUSINESS ENTITY

The first question deals with the entity which is being value.

The criteria for the simplest and most common case are these:

a. the entity is one corporation (or many corporations with a single consolidated statement and tax return) that has tax returns for at least the last three years, and financial statements for at least the last three years,

(or, the entity is another legal form of business such as a partnership or proprietorship, provided that it has at least three years of financial statements including balance sheets, and tax returns.)

b. Substantially all of the assets including real estate, if applicable, that are in the entity (and none that are outside the entity), will be included in the valuation. (See separate discussion of the real estate below.)

c. There is only one type of stock for a corporation, i.e. common stock, with no preferred stock, no class B common stock, no options nor warrants, nor other form of hybrid ownership.

(or, the partnership has only one level of ownership, i.e. all partners in a partnership have equal rights in proportion to their total share of the partnership.)

Please select the Yes option in the select box below, if your business meets criteria a, b, and c above.

If not, please select your estimate of the number of entities (corporations, partnerships and/or proprietorships) that must be consolidated or restated to identify the final entity that you wish to be valued.

2. REAL ESTATE

How is the real estate that your business occupies to be treated? If the real estate is leased or rented at an arm's length value, then we may proceed easily.

If the real estate assets of the business have limited use related to the business of the company, or if they are not a significant portion of the business' assets, then we also may proceed easily.

However, when real estate is a large portion of the assets of the business, it is important that the real estate be valued separate and apart from the business valuation. This is especially true if the real estate is prime property with general purpose uses, say in a growing industrial park. Your financial statements may need to be restated to adjust the owned real estate to a pro forma lease basis.

Do we proceed easily without a restatement for real estate, or do we probably need to restate the financial statements to exclude the real estate? Real estate appraisals should be done by licensed commercial real esate appraisers familar with real estate values in your local area.

Please select one of the following:

3. ANNUAL SALES VOLUME

Please select the range for your annual sales revenues.

4. DISCRETIONARY EXPENSES

Privately owned businesses often minimize reported profits through discretionary expenses.

Discretionary expenses are paid to shareholder/officers to compensate for the risk associated with private ownership and the lack of liquidity associated with publicly held businesses.

Also, the profits of closely held businesses are usually deemed the result of dedicated work habits of the shareholder/officers and employees rather than a return on invested capital. As a result, it is frequently appropriate to pay discretionary expenses to those to whom the profits are mostly attributable and to pay lesser dividends on shareholder values.

There are many expenses, legitimate for tax purposes, that would not be considered essential by owners whose objectives are to maximize profits. The excess of owner's compensation based on what the company can afford over comparable market salaries for the services performed may be a discretionary expense.

Other discretionary expenses might be key man life insurance, certain travel and entertainment expenses, Board of Director expenses, etc.

Discretionary expenses might or might not be incurred if the business was owned by absentee investors.

Please select your estimate of the number of these type of expenses that would have to be adjusted in order to fairly show the income potential of your business as if it was owned by an absentee arm's length investor?

5. PRODUCT / SERVICE LINES

How many distinct product or service lines do you offer?

These are macro segments such as these examples:

For a manufacturer: manufacturing of:

Residential light bulbs,
Industrial lighting,
Specialty light bulbs.

This is three product lines. Note, this company might manufacture 25 different wattages of residential light bulbs, this would still be only one distinct product line.

For a sales & service company:

Equipment sales,
Shop repairs,
Parts sales,
Outside service.

This is four product lines. Note, this company might sell five different brands of similar equipment, this would still be only one distinct product line.

Eliminate minor areas. Only if a product or service line is more than 5% to 10% of your sales, should it be considered a separate macro area. Otherwise, it should be combined with other lines.

Please select the number of product or service lines for your business:

6. FACILITIES

An evaluation should involve a visit to, and detailed tour of each of the major facilities the business operates. Included would be the headquarter's offices, all larger retail or wholesale centers, and all manufacturing or larger service facilities. Excluded would be sales offices, service satellites, and other minor facilities.

Some valuations are done totally by phone and mail. This procedure is not recommended and requires disclosure in the final report.

Combine into one when multiple facilities such as headquarters and operations are under one roof or within walking distance or within a one hour's drive from each other.

7. MINORITY INTEREST

When dealing with the buyout of another stockholder, or equity partner, a valuation often deals with less than 100% of the ownership of the business.

Please select what percentage of the business is being valued?

8. OTHER INFORMATION

Please enter any other information you believe will help us prepare a more accurate estimate for your Business Valuation.

CONTACT INFORMATION All fields must be completed

Name:

Company:

Title:
Address:

City:

State:

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Business Phone:

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ASSET VALUATION vs. STOCK VALUATION vs. TOTAL CAPITAL VALUATION.
or, When is the Price not the Price.
by: Pete Smith

One major cause of confusion and negotiation problems in the sale of a small business is the definition of what is included in the price.

Let us look at a typical small business. The assets, or what the company owns, are usually grouped similar to the following

Cash
Accounts Receivable
Inventory
Other Current Assets
Buildings and Other Depreciable Assets.

And the liabilities, or what the company owes, are usually grouped similar to the following:

Accounts Payable
Other Current Liabilities
All Interest Bearing Liabilities - Debt

Subtracting the liabilities from the assets gives us what is leftover, the Stockholder's Equity. Since most small businesses only have one class of stock, the book value of the Stockholder's Equity is equal to the book value of the Common Stock and the retained earnings.

In a true sense, the price for an incorporated business should be the fair market value of the Stockholder's Equity or Common Stock as determined by a business valuation or appraisal. In reality, this number is subject to a lot of negotiation. This is the amount of money the stockholder(s) will have after everything is settled except income taxes. After closing, the accountants usually spread the price around in many ways complex ways, often to lower the total tax liabilities of the transaction. However, that is not the source of the confusion we are concerned with here.

A typical small business sale transaction is the sale of the Inventory, and Buildings and Other Depreciable Assets, plus any Goodwill ascribed to the company. It is not the sale of the Common Stock of the company. The seller usually retains the Cash, Accounts Receivable, and the Other Current Assets. Typically, the seller will pay off the Accounts Payable, Other Current Liabilities, and All Debt from the proceeds at closing.

Certain other current assets or liabilities may be transferred to the buyer as business conditions dictate, but are adjustments in the cash paid at closing. This is similar to an adjustment for property taxes when buying real estate. It affects the cash at closing, not the price. No confusion here.

The source of confusion is what's included in the price that is: a) estimated in the business valuation, b) offered by the seller, c) understood by the buyer, d) negotiated by the parties and e) eventually paid at closing. Is this the price for the Common Stock or the combination of the Buildings and Other Depreciable Assets, Inventory, and Goodwill, or some other combination of assets and liabilities? When a price is discussed, the definition of what the price includes may be different to the different parties involved.

Very early in my career, I encountered this exact problem. We had been in negotiations for some time when the buyer made it clear that he was dealing with the price of the Common Stock. The seller had been negotiating with the understanding that we were dealing with the price of the Buildings and Other Depreciable Assets, Inventory and Goodwill.

Fortunately, for everyone, the difference between the two amounted to only a few thousand dollars and we reached a settlement and completed the transaction. (Author's Note: This confusion has NEVER been repeated, and NEVER will be repeated to any client of mine!)

Compounding the confusion is that fact that Business Valuation methods vary. Some methods:

value the Stockholder's Equity or Common Stock
value the Buildings and Other Depreciable Assets and Goodwill and add inventory dollar for dollar
value the Buildings and Other Depreciable Assets, Inventory and Goodwill together
value the Total Capital

The Total Capital is the sum of the Stockholder's Equity and the Debt. Many valuation methods value the Total Capital based on the assumption that equity versus debt is a financing decision not an operational decision.

Regardless of what valuation method is used, the eventual net amount to the Seller (before income taxes) should be the same after everything in completed, i.e. the "dust" settles.

For one company, the value of the Stockholder's Equity was $451,000, which would be the price if the Common Stock was sold to the Buyer.

The Buyer bought only the Building and Other Depreciable Assets and $312,000 was paid for them at the closing.

An additional $139,000 was generated from the following.

the buyer purchased the inventory, and
the seller turned the Accounts Receivable and Other Current Assets into cash, and
the seller paid off the Accounts Payable, Other Current Liabilities, and the Debt.

There are two important messages for the seller.

First, understand completely what is included and what is excluded when you are presented with any business valuation. Is the business valuation valuing the equity, the capital or the assets? What is the bottom line to you, the stockholder, after the "dust" settles? In every valuation I do, whether we end up with a price for assets, capital, or equity, I make the adjustments necessary to show the client what he or she can expect to receive after everything is done - but, before income taxes. I always recommend that a client take the business valuation to their accountant to get an estimate of the potential tax liability.
Second sellers, buyers, intermediaries and anyone involved in the sale of a business shold clearly state and clearly understand what is included and what is excluded from the price during all of the negotiations. Items may be added or subtracted to the transaction later if business conditions change or certain assets are purchased or sold before closing.

Violations of these messages occur often. One of the worse culprits is "Cocktail Party" talk about the price of a business. At a large party I attended during a convention, I heard a seller bragging about the high price he had received for the business.

Somewhat later as the party got a little rowdier, I heard the buyer bragging about the low price he had paid for the same deal. Since I was the intermediary on the transaction, I knew the details. The prices quoted by the buyer and seller were wildly different and yet they were both RIGHT!

The seller had included in his price the amount of money to be paid in his employment agreement, the non-compete agreement, the lease and the debts assumed by the buyer. The buyer, on the other hand, included in his price only the cash paid at closing and ignored all of the assumed debts and liabilities, new financing, and future commitments made to the seller.

I had made sure both parties know what was included in and excluded from the price during the negotiations of this deal. The true price was somewhere in the middle. However, bragging rights at the cocktail party trumped the strict definitions we used during the negotiations.

In similar off hand chatter, sometimes envious associates will comment to a seller before a sale that the asking price of the business is too low. My recommendation is always for the seller to ask, "Is that an offer?" It will quickly end any further comments.

Moral of this article: be absolutely clear about what is included in the price of the sale of your business.

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VALUE-A-BUSINESS.COM

QUESTIONS FOR BUSINESS VALUTION ESTIMATE