Expert answer:Choose an approach and how will it affect your bus
Solved by verified expert:Assignment 11:ValuationYou will find information on Valuation in Chapter 7 of Steven Rogers’ The Entrepreneur’s Guide to Finance and Business: Wealth Creation Techniques for Growing a Business. As it says:”There are numerous reasons why an entrepreneur should know the value of his or her business. These include:To determine a sale price for the companyTo determine how much equity to give up for partnership agreementsTo determine how much equity to give up for the investor capital”I have placed into D2l the Business Valuation Report for Client Business, Inc. both in a Word Document and PDF. This is a sample so the names are generic but I think it does a good job of showing the work that goes into valuing a business by a professional business appraiser, Certified Business Appraisals, LLC. I would like to your team to complete the following task.I would like you to select one of the three fundamental ways to measure the value of a business:• Asset approach.• Market approach.• Income approach.Please answer the following questions:I would like you to explain how the method was accomplished with this company.Then I would like you to tell me what you see a downsides of using this method alone.Then tell me what this valuation might find as a value for your company.The business in the professor is talking about is a cafe bistro. It provides services and products to customersUse the file i attached to find the approach
certified_business_appraisals.docx
Unformatted Attachment Preview
Certified Business Appraisals, LLC
Business Valuation Report
Prepared for:
John Doe
Client Business, Inc.
1 Market Way Your Town, CA
January 25, 2012
Table of Contents
Description of the Appraisal Assignment ………………………. 3
Standard and Premise of Value ………………………. ………… 3
Scope of the Report ……………………………………………….. 3
Information Sources ……………………………………………….. 4
Business Description ……………………………………………….. 4
Industry Overview ………………………………………………….. 5
Financial Statement Reconstruction and Forecasts …………… 6
Business Valuation Approaches and Methods ………………….. 10
Asset-Based Business Valuation Results ………………………… 11
Market-Based Business Valuation Results ………………………..12
Income-Based Business Valuation Results ……………………….15
Conclusion of Business Value ……………………………………….19
Business Value and Selling Price Considerations ………………..20
Business Price Justification ………………………………………….21
Statement of Limiting Conditions …………………………………..23
Appraiser Credentials and Certification ……………………………24
List of Abbreviations ………………………………………………….
List of Tables
Table – 1. Income Statement Reconstruction ……………………. 8
Table – 2. Income and Expense Forecast …………………………. 9
Table – 3. Balance Sheet Reconstruction …………………………. 9
Table – 4. Additional Balance Sheet Related Items ……………… 9
Table – 5. Equity Discount Rate Build Up …………………………. 12
Table – 6. Business Valuation Multiples …………………………….15
Table – 7. Business Value Estimation using Multiples …………… 16
Table – 8. Business value estimation using Rules of Thumb …….17
Table – 9. Seller’s Discretionary Cash Flow calculation …………..18
Table – 10. Business Valuation Factors selection ………………….19
Table – 11. Conclusion of Business Value …………………………. 20
Table – 12. Business Sale assumptions ……………………………. 22
John Doe Client Business, Inc. 1 Market Way Your Town, CA January 25, 2012
Re: Appraisal of Client Business, Inc.
Dear Mr. Doe,
We have been engaged to estimate the fair market value of the business
enterprise known as Client Business, Inc. as of January 25, 2012 for the purpose
of offering the subject business for sale. At your request, rather than preparing a
self contained comprehensive report, we have provided a restricted use limited
appraisal report, which is advisory in nature and intended to be used for offering
the subject business for sale. Please refer to the statement of limiting conditions
contained in the report.
For the purposes of business appraisal, fair market value is defined as the
expected price at which the subject business would change hands between a
willing buyer and a willing seller, neither being under a compulsion to conclude
the transaction and both having full knowledge of all the relevant facts.
We have appraised a fully marketable, controlling ownership interest in the
assets of the subject business. The appraisal was performed under the premise of
value in continued use as a going concern business enterprise. In our opinion this
premise of value represents the highest and best use of the subject business
assets.
Based on the information contained in the report that follows, it is our estimate
that the fair market value of Client Business, Inc. is:
Business Enterprise Value: $1,191,702
The Business Enterprise Value includes inventory, furniture, fixtures and
equipment, and all intangible assets, including business goodwill. It excludes
cash, or cash equivalents, accounts receivable, real estate, non-operating assets
and all business liabilities. The valuation is subject to the information provided
to us as well as the assumptions and financial data which appear in the report.
We have no obligation to update this report or our conclusion of value for
information that comes to our attention after the date of this report.
We have appraised the subject business in accordance with the Uniform
Standards of Professional Appraisal Practice (USPAP) as promulgated by the
Appraisal Foundation and the International Valuation Standards (IVS) published
by the International Valuation Standards Council.
This business appraisal follows the requirements of a valuation engagement, as
that term is defined in the American Institute of Certified Public Accountants
Statement on Standards for Valuation Services No. 1 (SSVS No. 1).
Sincerely,
Jane Analyst, Senior Valuation Analyst, ASA, CBA, MBA Partner, Certified
Business Appraisals, LLC
Description of the Appraisal Assignment
Certified Business Appraisals, LLC has been retained by Mr. John Doe to
estimate the fair market value of Client Business, Inc. on a marketable,
controlling ownership basis as of January 25, 2012.
The purpose of this appraisal is solely to provide an independent valuation
opinion in order to assist Mr. Doe in offering the subject business for sale. As
such, this appraisal report is intended for use by Mr. Doe only.
This valuation engagement was conducted in accordance with the International
Valuation Standards and AICPA SSVS No. 1. The estimate of business value
that results from this valuation engagement is expressed as a conclusion of
business value, elsewhere in this Detailed Report.
Standard and Premise of Value
This appraisal report relies upon the use of fair market value as the standard of
value. For the purposes of this appraisal, fair market value is defined as the
expected price at which the subject business would change hands between a
willing buyer and a willing seller, neither being under a compulsion to conclude
the transaction and both having full knowledge of all the relevant facts.
This is essentially identical to the market value basis as it is defined under the
International Valuation Standards.
The appraisal was performed under the premise of value in continued use as a
going concern business enterprise. In our opinion this premise of value
represents the highest and best use of the subject business assets.
Scope of the Report
This appraisal report is performed on a limited scope basis, as it is defined in
USPAP pursuant to the invocation of the Departure Rule. Specifically, the report
is not a self-contained comprehensive valuation report that is otherwise required
by the Revenue Ruling 59-60.
As required by USPAP, the departures taken during the preparation of this
appraisal report are indicated below as follows:
We have not conducted a site review of the subject business premises, nor have
we audited or otherwise reviewed the business financial statements, which have
been provided by the business management and its financial advisors. It was
assumed that these financial statements are true and accurate.
Information Sources
The following sources of information were used in preparing the appraisal:
1. We conducted interviews with the Client Business, Inc. management team.
2. National, regional and local economic data were compiled and reviewed. The
sources used include [Note: enter your economic research data source references
here. See valuadder.com Resources Web page for source suggestions].
3. Research of comparative business sale transaction data has been performed.
This included data compilation from the [Note: enter your data source references
here] private company and publicly traded company sale databases. The
transactional data, however, is not included in this report.
4. We have consulted the [Note: enter your cost of capital sources here] for the
cost of capital data. This data were used in estimating the appropriate discount
and capitalization rates.
5. Business financial statements and tax records of the subject business over the
most recent 4 years have been analyzed to estimate the business current
performance and outlook for continued income generation.
6. Financial statements, including the company historic Income Statements and
Balance Sheets, have been reconstructed to determine the business earning
power and provide inputs for the selected business valuation methods.
Business Description
The subject business being valued is Business Services, Inc; a subchapter S
corporation, incorporated under the laws of the state of California.
Business Services, Inc is located at 1 Market Way, Your Town, CA.
It is engaged primarily in providing a range of management consulting services
to a number of small and mid-size businesses. Businesses of this type are
generally classified under the SIC (Standard Industrial Classification) code 8742,
Management Consulting Services.
Client Business, Inc. has been founded in 1985 at its current location by Mr.
John Doe. It provides a broad range of general business management and
marketing advice services to local privately held businesses.
Business revenue growth has averaged 5% annually for the last 5 years of
operations. Client Business, Inc. enjoys a large customer base of over 500 clients
with no single client accounting for more than 2% of its revenues.
Business is generated primarily through repeat engagements with existing clients
as well as client and professional referrals. Client Business, Inc. enjoys excellent
client retention with 91% of the clients continuing to do business with the
company 3 years after the initial engagement.
Mr. John Doe is the sole shareholder with all of the 1,000,000 shares of common
stock issued to date by Client Business, Inc.
Mr. John Doe holds the posts of the company’s President and Chief Executive
Officer. He also acts as the Chairman of the Board.
In addition to Mr. John Doe, Client Business, Inc. employs a staff of 5 which
includes a Vice President and General Manager, three professional marketing
consultants and an administrative assistant.
The business ownership seeks to obtain a business appraisal in order to offer the
business for sale. The General Manager who has been with the business for the
last 10 years plans to remain past the business sale. In addition, all of the skilled
staff members have also expressed interest in continuing with the business past
the ownership transition.
Industry Overview
The management consulting services industry, SIC 8742, has an estimated
185,732 establishments throughout the US employing some 1,173,378 people.
The industry generates the total annual sales of $171,585.1 million. An average
firm produces $1,000,000 in sales with a staff of 6.
Firms employing 10 people or less comprise 89.8% of the total number of
businesses. These businesses produce about 1/3 of the total industry revenues.
In California, there are 26,553 such establishments, a 14.3% of the total. The
average firm generates $700,000 in annual sales and employs 5 people.
The industry continues to provide solid opportunity for growth of small privately
held firms. These businesses rely upon the skill and initiative of individual
professional practitioners to provide differentiated services to their clients at
competitive prices. Industry consolidation is low with the top 20 firms
responsible for just 5.3% of the industry total revenues. Through the last 5 years,
the industry continued to grow at a robust 11.2% per year on average.
[Note: include a discussion of the market factors affecting businesses in your
specific industry. Also provide a summary of the industry consolidation trends
and growth prospects.]
Financial Statement Reconstruction and Forecasts
Accurate estimation of business value depends upon the subject business
financial performance. While historical financials are important, business value
relies upon the ability of the business to continue producing desired economic
benefits for its owners.
Many closely held companies are managed to minimize taxable income. To
determine the business value accurately, the company’s historic financial
statements, such as its Income Statements and Balance Sheets, generally require
certain adjustments.
The objective of these adjustments is to reconstruct the historic financial
statements in order to reveal the true economic potential and earning power of
the subject business.
All financial values incorporated in this Report are in USD.
Earnings Basis used for Business Valuation
Small business valuation generally relies upon some measure of business cash
flows as the earnings basis. The most commonly used earnings basis measures
include:
Seller’s discretionary cash flow (SDCF).
Net cash flow.
Seller’s Discretionary Cash Flow
A widely accepted definition of SDCF is:
1. Pre-tax business net profit.
2. Plus total compensation of a single owner-operator.
3. Plus adjustment of all other working owners’ compensation to market rate
(manager replacement).
4. Plus annual depreciation and amortization expense.
5. Plus interest expense.
6. Plus non-recurring expenses.
7. Plus expenses not related to the business operations.
This is also referred to as the Seller’s Discretionary Earnings (SDE).
Net Cash Flow
Net cash flow is defined as follows:
1. After-tax business net profit.
2. Plus depreciation and amortization expense.
3. Plus decreases in working capital.
4. Plus tax-affected interest expense.
5. Plus preferred dividend payouts.
6. Less annual capital expenditures.
Sources of Company Financial Information
Historic financial statements and forward-looking projections have been
obtained from the subject business management and have not been audited to
confirm their accuracy. In preparing this Report we have taken these financial
statements and projections to be true and accurate.
Cash on hand has been adjusted down to the amount required to support normal
business operations.
Amounts deemed uncollectible have been removed from the value of the
accounts receivable.
Reconstructed Income Statements
Reconstructed Income Statements
The summary of the most recent annual historic Income Statements and the
appropriate adjustments are summarized in the table below:
Historic Income / Expense
2008
2009
2010
2011
Gross revenues
$850,000 $892,500 $937,125 $983,981
Less returns and discounts
$1,200 $1,450 $1,710 $1,495
Net Sales
$848,800 $891,050 $935,415 $982,486
Cost of Goods Sold (COGS)
$509,314 $534,630 $561,249 $589,492
Gross Profit
$339,486 $356,420 $374,166 $392,994
Operating Expenses
$331,032 $347,509 $364,812 $383,170
Operating Income
Other income / (expenses)
Net Pre-Tax Income
Taxes
Net Income
Adjustments
Single owner total compensation
Other working owners compensation
Less manager replacement of other
working owners
Depreciation and Amortization expense
Interest expense
Non-recurring expenses
Non-operating expenses / (income)
Seller’s Discretionary Cash Flow
EBITDA
Changes in working capital
Capital investments
Dividend payouts / Partner Draws
Net Cash Flow
Balance Sheet Items
Assets
Current Assets
Cash
Accounts receivable
Investments
Deposits
Inventory
Total Current Assets
Fixed Assets
Furniture and fixtures
Equipment
Real estate
Total Fixed Assets
$8,454
$0
$8,454
$1,691
$6,763
$8,911
$0
$8,911
$1,782
$7,129
$9,354
$0
$9,354
$1,871
$7,843
$9,824
$0
$9,824
$1,965
$7,859
$169,760 $178,210 $187,083 $196,497
$125,000 $128,000 $135,000 $137,000
($75,000) ($76,000) ($80,000) ($83,000)
$42,440 $44,552 $46,770 $49,124
$12,000 $14,500 $15,500 $13,200
$0
$18,000 $0
$0
$0
$0
$0
$0
$282,654 $316,173 $313,707 $322,645
$62,894 $67,963 $71,624 $72,148
($5,500) ($12,000) ($4,500) ($4,900)
$15,200 $25,120 $17,500 $12,350
$174,200 $201,500 $190,050 $200,000
$223,303 $251,661 $243,703 $260,093
Recorded Adjustments Adjusted
$201,990 ($ 150,000)
$ 65,194 ($ 15,000)
$0
$0
$ 12,000 ($ 12,000)
$ 29,520 ($ 5,500)
$308,704 $ 126,204
$ 51,990
$ 50,194
$0
$0
$ 24,020
$103,592 $ 45,000
$ 89,500 $ 25,000
$0
$0
$193,092 $ 263,092
$ 148,592
$ 114,500
$0
Less accumulated depreciation
$ 90,500 ($ 90,500) $ 0
Net Fixed Assets
$102,592 $ 263,092
Total Assets
$411,296 $ 389,296
Liabilities
Current Liabilities
Accounts payable
$77,350 $ 0
$ 77,350
Taxes payable
$0
$0
$0
Short-term portion of long-term debt $ 0
$0
$0
Total Current Liabilities
$77,350 $ 77,350
Long-Term Liabilities
Bank loan
$0
$0
$0
Shareholder loan
$150,000 ($150,000) $ 0
Total Long-Term Liabilities
$150,000 $ 0
Total Liabilities
$227,350 $ 77,350
Net Worth
$183,946 $ 311,946
The value of the fixed assets was determined on the depreciated replacement cost
basis.
Shareholder loan has been removed from the long-term liabilities.
We also summarize several Balance Sheet related items that will be used in
certain business valuation methods detailed elsewhere in this Report: Item Name
Amount Total adjusted long-term liabilities $0 Total non-operating assets
$155,500 Net working capital $24,834
Item Name
Amount
Total adjusted long-term liabilities $0
Total non-operating assets
$155,500
Net working capital
$24,834
Table 4. Additional Balance Sheet Related Items
For the purposes of this Report, the non-operating assets are defined as those
assets not used to produce business income. The net working capital is equal to
the current assets less inventory minus the current liabilities, excluding the
current portion of long-term debt, if any.
Business Valuation Approaches and Methods
There are three fundamental ways to measure the value of a business or
professional practice:
Asset approach.
Market approach.
Income approach.
Under each approach, a number of methods are available which can be used to
determine the value of a business enterprise. Each business valuation method
uses a specific procedure to calculate the business value.
No one business valuation approach or method is definitive. Hence, it is common
practice to use a number of business valuation methods under each approach.
The business value then is determined by reconciling the results obtained from
the selected methods. Typically, a weight is assigned to the result of each
business valuation method. Finally, the sum of the weighted results is used to
determine the value of the subject business.
This process of concluding the business value is referred to as the business value
synthesis.
Asset Approach
The asset approach to business valuation considers the underlying business
assets in order to estimate the value of the overall business enterprise. This
approach relies upon the economic principle of substitution and seeks to estimate
the costs of re-creating a business of equal economic utility, i.e. a business that
can produce the same returns for its owners as the subject business.
The business valuation methods under the Asset Approach include:
Asset accumulation method.
Capitalized excess earnings method.
Market Approach
Under the Market Approach to business valuation, one consults the market place
for indications of business value. Most commonly, sales of similar businesses are
studied to collect comparative evidence that can be used to estimate the value of
the subject business. This approach uses the economic principle of competition
which seeks to estimate the value of a business in comparison to similar
businesses whose value has been recently established by the market.
The business valuation methods under the Market Approach are:
Comparative private company transaction method.
Comparative publicly traded company transaction method.
Income Approach
The Income Approach to business valuation uses the economic principle of
expectation to determine the value of a business. To do so, one estimates the
future returns the business owners can expect to receive from the subject
business. These returns are then matched against the risk associated with
receiving them fully and on time.
The returns are estimated as either a single value or a stream of income expected
to be received by …
Purchase answer to see full
attachment
How it works
- Paste your instructions in the instructions box. You can also attach an instructions file
- Select the writer category, deadline, education level and review the instructions
- Make a payment for the order to be assignment to a writer
- Download the paper after the writer uploads it
Will the writer plagiarize my essay?
You will get a plagiarism-free paper and you can get an originality report upon request.
Is this service safe?
All the personal information is confidential and we have 100% safe payment methods. We also guarantee good grades