Information used in a business valuation

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In this guide:

1. Valuing a business
2. Information used in a business valuation
3. Select a valuation method
4. How to value business assets
5. Key concepts in valuing a business

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In order to value a business, your financial adviser or valuer will need to see at least 5 years (if possible) of financial statements. They may also need to visit the premises to check operations and the business's assets. They should also consider intangible assets, such as intellectual property, goodwill and the future outlook of the industry, and compare the business to similar businesses on the market.

A complete business valuation will answer the following questions:

Purpose of valuation

• Is the valuation for a buyer, seller, lender, investor or other reason (e.g. family estate plan)?

History of the business

• How long has the business been operating?
• How was the business started?
• Has the business changed its goals?
• What is the business's reputation?
• What is the condition of the facilities?

Employees

• What are the job descriptions of all staff?
• Are there any specialist skills required to run the business?
• Is the business reliant on a few people?
• What are employee pay rates?
• How is staff morale?

Legal and commercial information

• Is the business involved in any current or pending legal proceedings?
• Does the business comply with environmental and workplace health and safety laws?
• Does the business have any long-term commercial contracts? How long are these valid for and how much are they worth?
• Does the business have necessary licences, permits and registration?
• What lease arrangements does the business have?

Financial information

• Is the business making a profit?
• Is there working capital or sufficient cash flow?
• How much of a loan can the cash flow support?
• What has the annual turnover been for the past few years?
• Have the turnover and profit been increasing, decreasing or remaining the same?
• What tangible assets, such as machinery, buildings and equipment, does the business have?
• What is the market value of these assets in their present condition?
• What liabilities, such as unpaid accounts, mortgages, does the business have?
• Does the business have enough working capital to pay shareholder dividends?
• What is the book value - rather than the retail selling price - of the stock?
• What proportion of the stock is obsolete or unsellable?

Goodwill or other intangible assets

• Is there goodwill attached to the business? If so, can it be transferred to a new owner?
• Are other intangible assets, such as intellectual property, for sale?

Market information and industry conditions

• What is the short-term and long-term industry outlook?
• Will specific economic factors directly affect the business?
• Is this market growing, steady or shrinking?
• Who are the business's competitors?
• Are there any barriers to entry?
• What market share does the business have?
• What is the market price of similar businesses?
• What competitive advantages does the business have?
• What will be the impact, if any, of the departure of the current owners/managers?

Why is the Date of Valuation Important?

In fact, in our experience, it seldom is. But when there are unusual circumstances, the date of valuation can be as critical as the Standard of Value imposed.

From time to time we see a case where the managing spouse has taken covert or overt steps to adversely affect the value of the community-owned business. The dentist, for example who reduces his case-load voluntarily, or the contractor who delays signing contracts until after the trial to divide the community. Other times, we see the case discussed by the Court in Duncan, where the value of the business increases owing to the efforts of the managing spouse. In these fairly rare circumstances, the value of the company can vary substantially between separation and trial.

As a practical matter, it is a good idea to have your appraisal expert value the company at both dates of valuation, especially where the date of value has not been decided in advance.Why is the Date of Valuation Important?

In fact, in our experience, it seldom is. But when there are unusual circumstances, the date of valuation can be as critical as the Standard of Value imposed.

From time to time we see a case where the managing spouse has taken covert or overt steps to adversely affect the value of the community-owned business. The dentist, for example who reduces his case-load voluntarily, or the contractor who delays signing contracts until after the trial to divide the community. Other times, we see the case discussed by the Court in Duncan, where the value of the business increases owing to the efforts of the managing spouse. In these fairly rare circumstances, the value of the company can vary substantially between separation and trial.

As a practical matter, it is a good idea to have your appraisal expert value the company at both dates of valuation, especially where the date of value has not been decided in advance.

Why do a biz valuation

Why Do A Business Valuation?

By Leonard Holler, Wyoming Entrepreneur – Small Business Development Center Regional Director and Certified Valuation Analyst.

Gil in Cody, Wyoming asks, “Why would a small business owner, like myself, need a valuation done? I am not trying to sell my business.”

At first it might seem that the only reason for a business valuation is for no more than the casual interest of a business owner. The fact is that there are as many kinds and varieties of values as there are reasons for valuing a business.

In some recent articles in Inc. magazine and Entrepreneur magazine, they conclude that business valuations are important for businesses of ANY size – and not just when a business is being bought or sold. Inc. magazine stated – “A business's success is ultimately measured by a business's value…. Knowing your net worth as a private business owner provides a useful snapshot of where your company stands, what options it has, and how it can improve in the long term." In short, business valuations are a significant planning tool for small and large businesses alike.

They are used in various business situations and can be impacted by any number of circumstances. Some of the common uses of business valuations include –

• Determining the price to buy, sell or merge a business.
• A reality check of your business performance.
• A tool for developing employee and business improvement goals.
• Setting prices for adding new shareholders, new stock purchases or buying back shares from existing shareholders.
• Helping determine the business owner’s personal net worth for estate planning, insurance requirements and financial planning.
• Obtaining or even maintaining financing options.
• Employee stock ownership plans (valuations are required by ERISA).
• Stock bonuses or other compensation incentive plans.
• Going public and IPO research.
• Feasibility of management or leveraged buyouts.
• Divorce proceedings of owners and shareholders.
• Various litigation support documentation.
• Mediation and arbitration of disputes between shareholders or business partners.
• Value of business spin-offs.
• Bankruptcy, business liquidation or reorganization decisions.
• Exit strategy planning and development.
• Conducting due diligence on mergers or acquisitions.

Business owners also need to periodically evaluate their own performance. Financial ratio analysis and business valuations can help them objectively determine their management effectiveness. This is not the only measurement of how well a business is operating, but can give you reason to ask more questions about how you operate your business.

- See more at: http://wyomingentrepreneur.typepad.com/blog/2010/03/why-do-a-business-valuation.html#sthash.WpYfMPOA.dpuf

Valuation Key to M & A

It has been a few years since the last big wave of mergers and acquisitions, but as baby boomers approach retirement, the M&A arena likely will heat up again. Valuation services are essential for both buyers and sellers in the M&A process, and valuation experts are critical to the success of a buyer’s or seller’s advisory team.

On the Selling Side

Business owners – particularly those who founded the business – often have an unrealistic idea of the company’s value to a buyer. Sometimes it’s just false hope or an inflated ego that clouds the owner’s vision. More often, however, owners have a number in their head that they believe the company is worth, but can’t support that number with data.

For this reason, it’s a good idea to have a business valuation performed early in the sale process. This will give the owner a range of realistic values to pursue, based on comparable companies and multiples of EBITDA, sales, book value or other relevant data. If the range is unacceptably low to the owner, it will also give him or her time to make adjustments in the company, increase earnings or address other problems before sale.

Valuation experts also assist business owners in several other areas before and during the sale process:

Confidential Offering Memorandum: The confidential offering memorandum is a formal offer to sell the business. It presents an overview of the company and its management, historical data from audited or reviewed financial statements, and other information of interest, customized for potential buyers.

A business valuation professional plays an important role in the preparation of this document. The valuation expert is tuned into the synergies the business has with each potential buyer and can tweak the overall presentation of the company’s strengths to align them with the needs of targeted buyers.

Data Room Set-Up and Due Diligence Response: As potential buyers respond to the confidential offering memorandum, the valuation expert should be considered as the gatekeeper for the due diligence team. He or she often sets up and monitors the “data room,” or online repository of information, as it is made available to buyers.

The valuation expert also plays a role in crafting due diligence responses. His or her input can help sellers avoid problems by revealing too much, saying too little or using language in a way that may have unexpected consequences.

Purchase and Sale Agreement: The design of this legal agreement requires the input of the business valuation expert. He or she can:

• help draft wording that defines the purchase price,
• provide detail for calculations,
• give examples to illuminate the interpretation of legal terms, and
• ensure that the agreement is in conformance with the client’s accounting procedures and policies.

On the Buying Side

A valuation professional is also an integral part of the buyer’s advisory team. For example, a valuation expert has knowledge of the necessary financial information to draft the letter of intent to buy a business. He or she is also involved in determining fair market value, the synergies expected and the purchase price for the target business.

In the due diligence phase, a valuation expert can help the buyer by reviewing the initial valuation and the details of the confidential offering memorandum. Valuation professionals are also involved in drafting the purchase agreement and translating legal terms into workable examples.

When putting together an advisory team for mergers and acquisitions, choose a valuation expert who knows your business and industry. Given his or her knowledge, the business valuation expert can help ensure that you make the most of the purchase or sale.

MATERI PENDIDIKAN DASAR PENILAIAN I BISNIS

MATERI PENDIDIKAN DASAR PENILAIAN I BISNIS :
 Laba Rugi, Neraca, Arus Kas
 Analisis Perbandingan, Time Series Trens dan Common Size, Dupont
 Modal Kerja
 Manajemen Keuangan I
 Pengetahuan tentang Perpajakan di Indonesia
 Pengenalan Pasar Modal
 Pengantar Ekonomi Mikro dan Makro
 Pengenalan Jenis Saham

How To Value An Insurance Company

Most investors avoid trying to value financial firms due to their complicated nature. However, a number of straightforward valuation techniques and metrics can help them quickly decide whether digging deeper into valuation work will be worth the effort. These straightforward techniques and metrics also apply to insurance companies, though there are also a number of more specific industry valuation measures.

A Brief Introduction to Insurance

On the face of it, the concept of an insurance business is pretty straightforward. An insurance firm pools together premiums that customers pay to offset the risk of loss. This risk of loss can apply to many different areas, which explains why health, life, property and casualty (P&C) and specialty line (more unusual insurance where risks are more difficult to evaluate) insurers exist. The difficult part of being an insurer is properly estimating what future insurance claims will be and setting premiums at a level that will cover these claims, as well as leave an ample profit for shareholders.

Beyond the above core insurance operations, insurers run and manage investment portfolios. The funds for these portfolios come from reinvesting profits (such as earned premiums, where the premium is kept because no claim occurred during the policy's duration) and from premiums before they get paid out as claims. This second category is a concept known as float and is important to understand. Warren Buffett frequently explains what float is in Berkshire Hathaway’s annual shareholder letters. Back in 2000 he wrote:

"To begin with, float is money we hold but don't own. In an insurance operation, float arises because premiums are received before losses are paid, an interval that sometimes extends over many years. During that time, the insurer invests the money. This pleasant activity typically carries with it a downside: The premiums that an insurer takes in usually do not cover the losses and expenses it eventually must pay. That leaves it running an "underwriting loss", which is the cost of float. An insurance business has value if its cost of float over time is less than the cost the company would otherwise incur to obtain funds. But the business is a lemon if its cost of float is higher than market rates for money."

Buffett also touches on what makes valuing an insurance company difficult. An investor has to trust that the firm’s actuaries are making sound and reasonable assumptions that balance the premiums they take in with the future claims they will have to pay out as insurance payments. Major errors can ruin a firm, and risks can run many years out, or decades in the case of life insurance.

Insurance Valuation Insight 

A couple of key metrics can be used to value insurance companies, and these metrics happen to be common to financial firms in general. These are price to book (P/B) andreturn on equity (ROE). P/B is a primary valuation measure that relates the insurance firm’s stock price to its book value, either on a total firm value or a per-share amount.Book value, which is simply shareholders’ equity, is a proxy for a firm’s value should it cease to exist and be completely liquidated. Price to tangible book value strips out goodwill and other intangible assets to give the investor a more accurate gauge on the net assets left over should the company close shop. A quick rule of thumb for insurance firms (and again, for financial stocks in general) is that they are worth buying at a P/B level of 1 and are on the pricey side at a P/B level of 2 or higher. For an insurance firm, book value is a solid measure of most of its balance sheet, which consists of bonds, stocks and other securities that can be relied on for their value given an active market for them.

ROE measures the income level an insurance firm is generating as a percentage of shareholders equity, or book value. An ROE around 10% suggests a firm is covering its cost of capital and generating an ample return for shareholders. The higher the better, and a ratio in the mid-teens is ideal for a well-run insurance firm.

Income Approach is usually your best approach to business valuation

There seems to be a lot of confusion among my clients about business valuation. They think that it is based on the potential market in their industry or some “blue sky” number that they can’t quite quantify. There are generally only three approaches used in business valuation: the asset-based approach, the market approach, and the income approach. Now, I’ve given away the punch line of which I think is best with the title of this article; but humor me as I describe all three options.

The asset based approach basically just looks at the value of the assets on your balance sheet. Simple, huh? It assumes that your business’s value is equal to the sum of its assets or net asset value. This approach can work for asset based businesses but really misses the mark with service businesses with little to no assets on the books. And it misses a company’s intangible assets like its reputation, strong client list, etc.

The market approach looks at comparable sales of similar businesses. This real estate approach requires that you find “comps” to your business that sold recently. Easier said than done with privately held businesses. And just because another ABC business sold for $XX down the road doesn’t mean that your business is worth the same amount. They may have superior (or worse) processes,

products, reputation, etc.

Finally, there is the income approach. This approach looks at the cash flows of the business, projects them into the future with a  discount, and adds in the assets too. IRS Revenue Ruling 59-60 says that earnings are preeminent for the valuation of privately held businesses. The premise behind this method is that a company should not have a price higher than the amount of cash it will generate in the future. Also, the time value of money is factored in, ie., $100 today is worth more than $100 in ten years or

even one year.

Where people seem to get mixed up is the discount rate, so let’s talk about that. The discount rate is essentially a measure of how risky an investment in this particular company would be, or what the required return would be for investing. It’s composed of two parts, the risk-free rate, which is the return that an investor would expect from a secure, practically risk-free investment, and a risk-free rate that compensates an investor for the relative level of risk associated with a particular investment. A typical investment will carry a discount rate somewhere between 9% and 17%.

The benefit of this approach is that a business’s client base, superior processes/products, good reputation, etc. is typically reflected  in strong revenues and healthy cash flows. And healthy cash flows is what grows (and sells) a business. Cash (flow), as they say, is king.