Can you use financial ratio analysis in business valuation? If done correctly, this could be a helpful adjunct in your valuation. Specifically, reviewing financial ratios could help you spot the company’s strengths and weaknesses, and compare its performance to industry peers. Here are the major groups of ratios to consider in valuing a company: Short-term… Continue Reading
Business appraisers usually pick two approaches when valuing a start-up: the income approach and market comparables valuation. Income valuation challenge: earnings forecast If you focus on the income approach, be aware of its limitations. Since the young companies have limited track record of earnings, you face a challenge in forecasting the income stream with any… Continue Reading
Business people, investors, and creditors pore over financial statements to make decisions. If you are a business owner, you look at the company’s financials to see how well it has done, and what investments are needed to achieve its goals in the future. Investors, of course, want to know if the value of their investment… Continue Reading
Take a look at a typical business valuation and you will see a discussion of discount and capitalization rates. These are often confused with each other, usually because capitalization is a special form of discounting in valuation. Capitalization of business earnings is very common. Basically, you use the expected economic benefit for a single time… Continue Reading
Risk and return go hand in hand when it comes to valuing a business. Every company must be able to attract and retain the needed capital in order to continue. The cost of capital is thus an important input in your business valuation. Beta and systematic business risk There is a notion of systematic risk,… Continue Reading
The questions of risk and return are at the foundation of business value. Think about it: if you are putting your hard earned money into an investment, you would like to see a handsome return. But there is no guarantee. In fact, depending on the investment, you could get the return you expect, get more… Continue Reading
Some businesses like secure long term contracts that ensure continued revenue streams far into the future. What is the effect of such contracts on business value? The answer is twofold. First, the contractually guaranteed revenue stream reduces business risk. You essentially have a very good idea of what the earnings from such a contract will… Continue Reading
By established convention, appraisers value companies on the business enterprise value basis. For publicly traded companies, this is the sum of the shareholders’ equity, less cash or cash equivalents, and the total value of debt. This represents the current value of the company regardless of the capital structure. In other words, the levels of debt… Continue Reading
Business people are sold on the usefulness of financial statement projections for company financial management purposes. Pro forma financials are the staple of corporate financial analysis. In addition, these pro forma projections form the basis for credit analysis and estimation of how much debt or equity financing the firm will need in the future. You… Continue Reading
You can value the entire business and calculate its value which includes all of its assets. This brings up a question, do individual business assets have value on their own? The answer depends upon the reason for valuation. Consider, as an example, a piece of machinery the business uses to produce its products. Chances are… Continue Reading
Did you know that businesses in the USA alone spend billions of dollars on appraisals every year? They need to do so for a diverse number of reasons: getting a loan against business assets, selling or buying a business, to obtain insurance or in cases of legal dispute. It would seem at first that the… Continue Reading
You may wonder: if professional business appraisals follow standards, such as the USPAP (Uniform Standards of Professional Appraisal Practice), why do the results often differ so much? The reality is that behind every business valuation is a client who expects a certain result. People get business appraisals for a reason. Take, for example, the typical… Continue Reading
Imagine, you are looking at an impressive, theoretically correct business valuation. No expense spared. Sharp analysis. Using the standard approaches. But this does not mean that the business will sell at the price that matches its value. Fair market value rarely equals the selling price in the real world The reason is that the fair… Continue Reading
Market approach to business valuation has a lot of appeal – it offers evidence directly from the market place where the actual business buyers and sellers negotiate company selling prices. If you get hold of enough sales data, the reasoning goes, you should be able to estimate the value of a similar business. The market… Continue Reading
As we talked about in an earlier post, employee stock ownership plans, or ESOPs, keep gaining in popularity as a cost effective way to transfer ownership to the company’s employees. Key elements of a successful ESOP But not every company makes a good candidate for an ESOP. Before taking the plunge, consider some key questions… Continue Reading