| The
set of forms on the following pages will produce a range of values (low-to-high) that you could
reasonably expect to receive for your business, and is based entirely on the
accuracy of your input. The result of these forms will indicate
whether the business value is generated by the earnings of the business or
by the tangible assets that will be included in a sale. This
valuation model is most applicable to the typical small businesses (sales
under $1 million), where the only assets that will be included in a sale are Inventory,
Consumable Supplies, and Furniture, Fixtures & Equipment
(FF&E). If you are contemplating a stock sale, where everything
would be included in a sale (Cash, Accounts Receivable, Inventory, FF&E, Accounts Payable, and Long Term Debt), then this is not the valuation model that you need to use.
You will need to gather up a few things
before you get started: Tax returns for the last 3 to 5 years; the most
recent year-to-date financial statements available; and
an up-to-date asset depreciation schedule or complete list of Furniture, Fixtures & Equipment owned by the business.
We'll now take a quick look at the
steps that you will follow to get to your business value. These steps
will sound more logical to you if look at your business from a buyer's
point of view.
- Earnings: You will develop a normalized level of
earnings for your business for the last three years. We'll make
some adjustments to earnings based on a number of factors.
- Assets: Of all of the assets that are owned by your company, you'll need to determine which assets are actually needed to operate
your business and generate earnings. This will normally
be the Furniture, Fixtures & Equipment that are continually used
and needed in the business. (No, the company owned BMW that you use
to commute to work everyday is probably not really required or needed).
Likewise for the plane, the hunting lodge, loans to relatives, real
estate, etc. Other items that you may see on your balance sheet
that won't be included in a sale are such things as Cash Value of Life
Insurance, Loans to or from Shareholders, Goodwill, Start-up
Costs, Organizational Costs, and Investments. While these are
all valid balance sheet items, they are not required to
operate your business. So figure out what is actually needed to run the business and what isn't.
The following general assumption will be made in
generating your range of values:
You will only be selling the earnings of the business, the inventory, and the operating
assets which are required to generate those earnings. You will be
retaining your Net Working Capital (Cash, Accounts Receivable, and Accounts
Payable).
Long term debt will be paid off from proceeds at or before closing (you'll
be transferring assets that are free and clear of all debt).
Real estate will not be included in our calculations here. If you are
selling the business real estate also, that value will just be added to the
values developed here. It's an additive value (business value + real estate
value).
|
