Blended Is Better!

There are a number of traditional accounting methods used to calculate business worth. None of these methods individually addresses all of the items that create value. One method looks at assets/liabilities while another will look at cash flow or market comps, each separately. It is not uncommon to see five different methods used for an appraisal, each being weighted or one being picked as the proper method with out any logical or statistical justification.

During my 23 years as a Business Broker and president of Business Appraisals I found that blending three of these different methods into one appraisal method captures all elements of a business that have value.

First I look at the P&L statement and cash flow. Adjustments are made in the form of add backs which, depending on the purpose of the appraisal reflect the cash flow of the business before discretionary spending of the owner/owners. A multiple that is statistically based on 25 years of business sales and appraisals is used to determine the cash flow value of the business.

Second I look at the Balance Sheet and the net worth (asset/liabilities). Again, adjustments are made based on the purpose of the appraisal. Book value is adjusted to reflect market value for equipment and real estate.

The third part of this appraisal process look at market conditions that reflect value, such as sales growth or decline, customer percentage of gross sales, profit margins and other market influenced items as needed.

All of this is then presented in a concise logical form with a description for each step in the process, giving the user a clear, understandable, accurate and affordable business appraisal.

Buainess Appraisal Reports Clarified

Most people would think that the business appraisal sector would be a very organized group, but they are not. I recently reviewed an article on a business appraisal technique by a writer from a Business Appraisal Association and half the professional appraisers responding did not agree with the writer.

First off, there is not a single standard method of appraising a business and none of the individual methods used by its self provides an accurate appraisal. There is also a vast divergence of quality business appraisers and business appraisal reports. I classify them into six different groups.

1.      The dedicated professional appraisers who mainly do large private corporations and charge large fees to do these complicated assignments. They understand the complexity of business appraisals and provide quality work.

2.      The typical small business appraisers may use four or five different methods in the same report and give each method a percentage weight. How they come up with the different weights I’m not sure. It seems as if they have already decided on the appraised value and adjust the weight percentages to justify their final appraisal number.

3.      The smoke and mirrors group will fill the appraisal with all kinds of useless reports and complex terminology. I have seen reports that are so grammatically and mathematically complex that they are totally impossible to understand. The writers rely on impressing their clients with their brilliance, hoping the reader can’t understand the report enough to realize they wasted their money. These appraisals tend to be extremely inaccurate.

4.      There are the on line groups charging very little for an appraisal. They can’t afford and probably don’t spend much time analyzing the business, its Financial Statements, Tax Returns and other important documents. The sample appraisals I have seen were inaccurate. I spend much more time analyzing the business and its financial documents than I do writing the report. A business appraisal is not an on line fill in the blanks type of report. It takes a knowable experienced expert who will take the time to truly analysis the business.

5.      Those that use the capitalization rate and rule of thumb methods are providing their clients with the average value of all the business used to determine the capitalization rate or rule of thumb numbers. Each business is different and an appraisal has to address the specific parameters of the business being appraised to be accurate.

6.      The blended method uses a combined report using the cash flow, asset and market value approaches to determine the business value. This blended method looks at all the elements that create value in a business and provides an appraisal unique and accurate for each business appraised. This method consistently works. Check out my blog for more information on this method. http://appraisalsbusiness.blogspot.com/

Most of the inaccurate appraisals I have seen appraised the businesses with a much higher value than they were actually worth. Some of the values were three times higher than the actual value. It also seems like the larger and more complex the reports, the less accurate they were. Quantity over Quality.

Blended Is Better!

There are a number of traditional accounting methods used to calculate business worth. None of these methods individually addresses all of the items that create value. One method looks at assets/liabilities while another will look at cash flow or market comps, each separately. It is not uncommon to see five different methods used for an appraisal, each being weighted or one being picked as the proper method with out any logical or statistical justification.

During my 23 years as a Business Broker and president of Business Appraisals I found that blending three of these different methods into one appraisal method captures all elements of a business that have value.

First I look at the P&L statement and cash flow. Adjustments are made in the form of add backs which, depending on the purpose of the appraisal reflect the cash flow of the business before discretionary spending of the owner/owners. A multiple that is statistically based on 25 years of business sales and appraisals is used to determine the cash flow value of the business.

Second I look at the Balance Sheet and the net worth (asset/liabilities). Again, adjustments are made based on the purpose of the appraisal. Book value is adjusted to reflect market value for equipment and real estate.

The third part of this appraisal process look at market conditions that reflect value, such as sales growth or decline, customer percentage of gross sales, profit margins and other market influenced items as needed.

All of this is then presented in a concise logical form with a description for each step in the process, giving the user a clear, understandable, accurate and affordable business appraisal.

Market Value Business Appraisals www.businessappraisals.com

Clear
Our business appraisals are written to be easily understood. We use common business terms, comprehensive step-by-step mathematical analysis and a thorough explanation of each step in the process. The result is an easy to read and understand report.

Accurate
By researching and analyzing business sales to determine components that represent value, we have created an accurate appraisal process. It is realistic and represents true market value. No rule of thumb or comps, our appraisals are unique to each individual business.

Affordable
By standardizing and simplifying the appraisal process we can offer more affordable pricing for our services.
Business Appraisals 800-829-4842
949-254-4062 Cel
714-639-6085 Direct
www.businessappraisals.com/rklein@businessappraisals.com

Searching for Market Value

There are a number of standard appraisal methods used to value a business that include, Asset approach, Income approach, Market approach (Comps), Capitalization of Earnings and Discounted Future Earnings. Each one of these methods individually does not always represent the true value of a business. We have seen appraisals where the derived value of these five different approaches varied by 500%.

Also used are Rule of Thumb values based on multiples of adjusted profits or percentages of gross sales. The rule of thumb methods only work when there are many similar businesses having the same operating expenses and assets. This doesn’t always happen and when you use the method on more unique businesses it just doesn’t work.

Using Comps tends to give the average value of the compared businesses and not the value of the business being appraised.

Capitalization of Earnings and Discounted Future Earnings are less often used and tend to end up with values far from Market Value.

After working with the standard methods for some time and evaluating what creates value in a business we learned that combining the Asset, Income and adding market influences into a single method gave an accurate market value. Having been involved with our own Business Brokerage for over twenty years we were also able to look at the businesses we sold and adjust and refine the combined method to reflect a True Market Value Appraisal.
Robert Klein

Business Sales Multiples

First we need to figure out what multiples we are talking about and what we are using them for. There are multiples of gross sales, seller’s discretionary earnings (SDE), earnings before interest and taxes (EBIT), earnings before interest, taxes, depreciation and amortization (EBITDA). Multiples are also used as general rules of thumb. For this article I will concentrate on the methods used for the purpose of the sale or purchase of a business.

Multiples of gross sales are the least accurate as they do not account for the quality and profitability of a business as they tend to be averages for classes of businesses. Some business owners know how to run a business and make excellent profits while others barely survive. These multiples are generally used for business categories that have large numbers of the same type of businesses, such as franchises.

Multiples determine the relative value of the business’s cash flow, but they do not measure the business asset value. I use a multiple to determine only the cash flow portion of the business. An asset bases analysis is a separate part of the appraisal.

For a sale of a business we need to know the SDE and the EBITDA In other words, the net income plus the seller’s discretionary earnings, interest, taxes, depreciation and amortization are necessary. This number should represent the amount of money a new buyer would expect to have available after purchasing the business. Interest and taxes will depend on how the business is financed and run. Depreciation and amortization are tax credits and the money remains in the business.

Differences in businesses will require use of different multiple values. Manufacturing businesses will have a middle of the road value while construction companies will have a multiple of about half and some high demand businesses may be double. Size matters, as larger businesses will have larger multiples.

Changes in economic conditions don’t change the basic multiples I use for appraisals. As economic conditions grow or deteriorate the gross sales and adjusted net profit of a business will go up or down thus increasing or decreasing the businesses value. I also use certain economic changes to adjust the net profit based on such things as growth or decline in sales over prior years, businesses having customers that represent a large percentage of their business and other cash flow influences. I very rarely find reason to adjust the multiples I use for an appraisal and I have been doing this for over 20 plus years.

Importance of a Business Appraisal

Would you buy or sell a house or commercial property without first having an appraisal? Most buyers and sellers of small businesses don’t bother determining a business’s true market value. Buyers are reluctant to spend money on an appraisal and sellers usually pick an arbitrary price or one higher than the business is actually worth. It is the selling broker’s responsibility to get the highest possible price for his client. Yes, the broker has a responsibility to be honest and fair to the buyer, but his primary responsibility is to his client. This leaves the buyer hanging out there with little sense of the business’ true value. He may bring in his accountant or other advisors but these people who are probably very good in their profession may not have the years of experience and skills necessary to determine the true market value of the business. Buying or selling a business is probably the largest financial transaction a buyer or seller will ever make in his life. It may involve his life’s savings, new debt or his entire retirement prospects. There are many situations where a buyer has paid too much for a business and can’t make it work. The buyer looses his investment, a bank may loose on its loan, and the seller will loose money he has lent to the buyer and possibly get a worthless business back. Doesn’t it seem important to confirm that the business you are buying or selling is a wise, or at least not a foolish sale or purchase? A Business Appraisal should be a mandatory process for any business sale or purchase. It definitely will increase the chance of success and protect the buyer’s and seller’s hard earned assets.