Business Valuation For Dummies

Introduction 1 About This Book 1 Conventions Used in This Book   2 What You’re Not to Read 3 Foolish Assumptions   3 How This Book Is Organized 4 Part I: What Business Valuation Means 4 Part II: Getting Familiar with Valuation Tools, Principles, and Resources   4 Part III: If You’re Selling a Business   4 Part IV: If You’re Buying a Business 5 Part V: Don’t Try This at Home! Turning Things Over to the Valuation Experts 5 Part VI: The Part of Tens   5 Icons Used in This Book   6 Where to Go from Here   6 Part I: What Business Valuation Means 7 Chapter 1: The Value of Understanding Business Valuation   9 Basic Tenets and the Importance of Valuation for Businesspeople   10 Value differs from price 10 Planning drives value 10 No two valuations are exactly alike   11 Valuation isn’t a one-time deal   12 The Basic Building Blocks for Calculating Value   12 Discount and capitalization rates: The numbers that really matter   13 Doing your homework: Due diligence   13 How rule of thumb enters into business valuation   14 Getting Expert Help   15 The Move toward Intangible Asset Valuation 16 Family Businesses: Important Valuation Targets 16 Chapter 2: What Triggers a Business Valuation?     19 Exploring Reasons for Wanting a Business 20 It’s time for a new career 20 You’re fulfilling a dream 21 You’re taking advantage of a strategic opportunity 22 You’re buying a business to pass on to your heirs   23 Shaking the Money Tree: How Lenders Make Thorough Valuation a Necessity 24 Borrowing to buy a business: What lenders want to see   25 Preparing for mergers and other big-money deals 26 Seeking new or continued funding for an existing business 27 Attracting public or private investors 27 What If You Want — or Need — to Sell a Business?   28 Doing some smart estate planning 28 Reaching retirement 29 Letting the kids take over   29 Facing threats from market forces 30 Separating from a co-founder or partner 30 Dealing with divorce 32 Exit Plans: Writing the Ending 32 Who benefits from an exit plan? 33 When should an exit valuation be done? 33 Chapter 3: Understanding the Tangibles and Intangibles of Business Valuation   35 Examining Your Reasons for Valuing This Business   36 Introducing Standards of Value   37 The mother of all standards: Fair market value   38 Perceptions of investment value   38 The fundamentals of intrinsic value 39 Going over going-concern value 39 Liquidation value   40 Adjusting or Normalizing a Financial Statement   41 Other Considerations: Science Meets Art 42 Adding business and economic news   42 Folding in tangible assets   43 Drawing valuation conclusions with intangible assets   43 Chapter 4: Approaches and Methods — Basic Theories of the Valuation Process   45 A Step-by-Step Overview of the Valuation Process   47 Risky Business: Gauging Circumstances for the Best Results   49 Understanding the different approaches 50 Calculating risk and its relationship to present value 55 Using discount and capitalization rates and income valuation methods   56 Chapter 5: The Challenge of Valuation in a Knowledge Economy   61 Moving from a Hard-Asset to an Intangible-Asset Economy 61 Reviewing types of assets   62 Recognizing the increasing value of intellectual property   63 Determining the Value of a Company Based on Ideas 64 The importance of real, documented income 64 What strategic buyers and lenders want to see 66 Reaching Intangible Value 67 Taking a stab at brand valuation   67 Recognizing customers as valuation drivers   69 Preserving Your Knowledge Business for the Future   70 Shaky times: When the founder’s brain leaves the building 70 What owners need to do: Planning ahead 71 Part II: Getting Familiar with Valuation Tools, Principles, and Resources 73 Chapter 6: Getting Familiar with a Typical Valuation Report   75 What a Valuation Report Is Supposed to Do 76 Outlining a Typical Valuation Report   76 Cover   77 Valuation summary 77 Valuation assignment 80 Economic outlook 81 Industry outlook   82 Business overview   83 Conclusion of value   85 Appendixes   86 Chapter 7: Meeting the Supporting Players in the Valuation Process   87 Getting Help in Valuing Your Business   87 Recognizing situations that call for valuation experts 89 Finding the experts you need   90 Seeking the qualities your experts should have 91 Appraising What Appraisers Do 92 How appraisers are trained and certified   93 What appraisers cost 95 How to examine a business appraiser’s work process   96 What to ask a prospective business appraiser 97 Taking Account of Accountants   98 How accountants are trained   99 How accountants are certified   100 What accountants cost   101 How to examine an accountant’s work process 102 What to ask a prospective accountant   102 Hiring Advocacy: Attorneys   103 How attorneys are trained and certified   104 What attorneys cost 105 How to examine an attorney’s work process   105 What to ask a prospective attorney 105 Brokers: One-Stop Valuation and Sale Services   106 How business brokers are trained and certified 107 What business brokers cost   108 How to examine a broker’s work process 108 What to ask a prospective business broker   108 Chapter 8: Understanding Financial Statements   111 Gathering the Financial Data You Need 112 Looking into Support Data   112 External data 112 Internal data   113 Taking a Look at Financial Statements   114 The balance sheet 114 The income statement   118 Statement of retained earnings 122 Cash-flow statement 123 Ratios and formulas for valuation   126 Chapter 9: Using Rule-of-Thumb Valuations for Mom-and-Pop Businesses   131 What Rules of Thumb Do in Business Valuation   132 2008 Rules of Thumb from the Business Reference Guide   133 Full-service restaurants   133 Bars 135 Gift shops 137 Medical practices   138 Auto repair shops 140 Day-care centers for children   142 Dry cleaning 144 Coin laundries 146 Bookstores 149 Bed-and-breakfasts 149 Part III: If You’re Selling a Business 153 Chapter 10: Making Sure You’re Ready to Sell     155 Understanding Why Timing Is Important   156 Examining the Motivations behind a Potential Business Sale   156 Anticipating the owner’s retirement   158 The kids are taking over!   158 Weighing the possibility of a merger or acquisition from a friendly suitor 159 Changing market conditions are threatening a company’s future 159 Bringing Valuation into the Picture before You Bring In the Buyers 159 Providing a reality check 160 Transparency: Preparing for a sale   161 Heading off problems to increase value   162 Determining the Kind of Transaction You Want   165 Outright sale   166 Employee stock ownership plan (ESOP) 166 Ownership transfer to key family members   166 Chapter 11: Deciding What to Do about the Family Company   167 Planning for the Worst Possible Scenario 168 Examining the State of the Family Business   169 Specific characteristics of family companies   169 How families hurt the value of their businesses 170 Why “equal” in a family business isn’t always fair 174 Getting Your Family Down to Business 175 Following a phased-in approach 176 Addressing the fairness question head-on   178 Setting up the best plan for the generations 178 Chapter 12: Due Diligence on the Sell Side   181 Looking at Why a Seller Has to Do Due Diligence   181 Understanding the Three Stages of Due Diligence 183 Tricks of the Trade: Collecting and Exchanging Information 184 Gathering your own company data   184 Protecting your company with a confidentiality agreement 187 Chapter 13: Case Study: Valuation on the Sell Side     189 Heading Off Common Valuation Disasters   190 Writing down your wishes 190 Making sure that your records are adequate   191 Taking time to plan 192 Considering confidentiality 192 Setting Up Your Prevaluation Plan 192 Finding the problems 193 Analyzing the prevaluation   195 Performing the Valuation   196 Taking valuation from fantasy to reality   196 Checking the structure of the deal 200 Looking at an example of a deal in progress 201 Part IV: If You’re Buying a Business 203 Chapter 14: How Do You Know Whether You’re Ready to Buy?   205 Knowing What Typically Drives a Business Purchase 205 Getting Ready to Buy 206 Tackling challenges unique to buyers   207 Looking at whether the business is right for you 208 Evaluating a failing business 209 Understanding how the mating process (typically) works 211 Restarting the Value Process   213 Chapter 15: Moving from Valuation to Negotiation   215 Knowing What Valuation Does for the Dealmaking Process 216 Identifying potential pitfalls and opportunities   216 Timing the purchase well   216 Minimizing emotional shocks   217 Getting Ready to Meet the Seller   217 Recognizing window dressing 218 Remembering motives 218 Knowing what sellers want   219 Let’s Make a Deal: Negotiating   219 Deciding whether to handle negotiations yourself   219 Getting ready to negotiate 220 Understanding what you should do in negotiation   222 Working with someone who’s negotiating for you 223 Chapter 16: Due Diligence on the Buy Side     225 Seeing What Due Diligence Means in Practice   225 Looking at the Unoffi cial First Stages of Due Diligence 226 Researching the company 227 Consulting your family and the pros   228 The Informational Game Plan: Cracking the Books (and the Internet)   229 Gathering the Company’s Data 231 Knowing which questions to ask about the target company   232 Checking with the company’s departments   233 Collecting Outside Data about Your Industry and the Economy 235 Chapter 17: Forensic Accounting and the Due Diligence Process     239 Understanding Forensic Accountants 239 Characterizing a qualifi ed forensic accountant   240 Recognizing situations that link forensic accounting and valuation 243 Comparing Basic and Forensic Accounting   246 Recognizing Business Situations That Trigger Forensic Accounting   247 Doing a Forensic Accounting Test   248 Looking at Forensic Accounting Case Studies   249 Chapter 18: Case Study: Valuation on the Buy Side     251 Being Frank: Selecting an Industry 251 Doing Research in Advance 252 Contacting the Target   253 Negotiating the quick-and-dirty valuation stage 253 Knowing when to talk and when to hang up 254 Moving on to Company Number Two   254 Seeing How Failing to Consult an Advisor Can Cost You   255 Knowing when to involve advisors 255 Encountering problems   256 Seeing what could’ve been done 258 Checking Benchmarking Data 258 Understanding Deal Structure   259 Part V: Don’t Try This at Home! Turning Things Over to the Valuation Experts 261 Chapter 19: Divorce   263 Doing Estate Planning Regardless of Marital Status   263 Planning Prenuptial and Postnuptial Agreements 264 Breaking down a prenuptial agreement 265 Creating a postnuptial agreement   267 Seeking the Correct Professionals   267 Looking at What Happens to a Family Business in Divorce   268 State laws on splitting property   270 The marital balance of power 271 Determining the Business Value in a Divorce 272 Keeping Valuation Dates in Mind 273 Chapter 20: Estate Planning and Gifting     275 Succession Planning: A Critical Part of Business Planning 276 Considering Family Matters   276 Anticipating problems   276 Considering blended and nontraditional families   277 Creating contingency plans for relatives who renege   278 Creating a Succession Plan   279 Creating an Estate Plan   280 Finding the Experts You Need for Estate Planning   281 Fitting Buy/Sell Agreements into Estate Planning and Valuation 282 Taking Gifting into Consideration   283 Gifting strategies 283 Gifting techniques 284 Chapter 21: Attracting Outside Investors to Your Startup     287 Exploring Your Startup Resources 288 Seeing How Valuation Professionals Work with Startups 290 Creating the Starting Point: The Business Plan   291 Working with Investors   292 Angel investors   293 Venture capitalists   294 IPO investors 295 Part VI: The Part of Tens 297 Chapter 22: Ten Reasons to Consider a Prenup   299 It Gets You to Talk Honestly about Money at the Start of a Marriage   300 Your Life’s Work Shouldn’t Go down the Drain   300 If Both Spouses Have Sacrificed to Build the Business, They Need to Share   301 The Working Spouse Shouldn’t Lose the Business Entirely 302 Kids from Earlier Marriages Need Protection 302 Kids from Your Next Marriage Need Protection, Too   304 Planning for Worst-Case Scenarios Is a Good Habit 304 Your Business and Personal Finances Really Are Connected   305 Family Legacies Need Protection 305 When a Marriage Ends, a Prenup (Or Postnup) Can Save You Both Money 306 Chapter 23: Ten Questions to Answer Before Considering a Partnership Agreement     307 Who Will Be in the Partnership? 308 How Much Capital Does Each Partner Have to Kick In at the Start?   308 How Will Decisions Be Made? 309 Do You Have a Plan for Resolving Disputes?   309 How Will the Firm Admit New Partners? 310 How and When Will Profits — or Losses — Be Shared?   310 What Happens If a Partner Leaves or Dies?   311 How Will the Partnership Be Sold or Dissolved?   311 How Will Legal Disputes inside and outside the Partnership Be Handled? 312 Will Noncompete Issues Be Covered?   312 Chapter 24: Ten Things to Consider Before Transforming Your Company Into an ESOP     313 Research How ESOPs Are Created 314 Understand Why ESOPs Are Attractive in Certain Situations 314 Know How the Tax Advantages Work   315 Examine How Valuation Comes In   316 Get a Handle on Your Launch Steps 316 Prepare for Preparation Costs   317 Get Ready to Train Next-Generation Leadership 317 Plan Ongoing Training for Employees 318 Estimate ESOP Costs after Launch 318 Realize That ESOPs Can Fail   318 Glossary 319 Index 327