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WILBUR M. YEGGE, PhD, has bought and sold five companies, brokered the sale of over 300 small businesses, and valued more than 1,000 others. President of a management consulting firm, he is the author of Self-Defense Finance for Small Businesses and A Basic Guide for Buying and Selling a Company, both published by Wiley.

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The Groundwork of Company Valuation for First-time Buyers and Sellers

A Basic Guide for Valuing a Company has helped thousands of first-time buyers and sellers realize a fair, substantiated value for small businesses. Now in its Second Edition, this book covers common valuation techniques and myths, tips for determining tangible and intangible values, sample balance sheets and income statements, and approaches to valuing start-up technology and dot-com businesses.

This nuts-and-bolts guide addresses publicly traded and privately held firms, including traditional brick-and-mortar companies and the intellectual property industry. With a clear, concise writing style, the author walks readers through common practices for valuing, from collecting data to arriving at a saleable figure for all types of businesses, including professional practice, manufacturing, wholesale distributors, and a variety of retail operations. This new edition features perspectives on nontraditional valuation practices, guidance for using an excess earnings method, and an abundance of case studies from actual companies.

In order to make the most profitable decisions, before putting a business on the market or making an offer to acquire one, every beginning business purchaser and seller should read A Basic Guide for Valuing a Company, Second Edition.

Aus dem Klappentext

The Groundwork of Company Valuation for First-time Buyers and Sellers

A Basic Guide for Valuing a Company has helped thousands of first-time buyers and sellers realize a fair, substantiated value for small businesses. Now in its Second Edition, this book covers common valuation techniques and myths, tips for determining tangible and intangible values, sample balance sheets and income statements, and approaches to valuing start-up technology and dot-com businesses.

This nuts-and-bolts guide addresses publicly traded and privately held firms, including traditional brick-and-mortar companies and the intellectual property industry. With a clear, concise writing style, the author walks readers through common practices for valuing, from collecting data to arriving at a saleable figure for all types of businesses, including professional practice, manufacturing, wholesale distributors, and a variety of retail operations. This new edition features perspectives on nontraditional valuation practices, guidance for using an excess earnings method, and an abundance of case studies from actual companies.

In order to make the most profitable decisions, before putting a business on the market or making an offer to acquire one, every beginning business purchaser and seller should read A Basic Guide for Valuing a Company, Second Edition.

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A Basic Guide for Valuing a Company

John Wiley & Sons

Chapter One

Mary said to me, "I got a deal! I bought 'X' and I paid 'Y' dollars for it!" My perception of her deal compelled me to say, "You paid what?!" As you already know, each person's observation of the same event can normally be counted upon to be quite different. This, of course, is true about value in small companies.

We must let go of old assumptions that we know how things work regarding price and value in small, closely held companies. We really don't. For one thing, the earmarks of entrepreneurs are their independence and nonconformance with traditional practices. Quite frequently, they will be found never agreeing on anything from the past. For another, they are not bound by the decisions passed down by a corporate board of directors.

The model definition of fair market value used by most professional appraisers tends to revolve around several connected definitions provided in Black's Law Dictionary. The terms "cash market value," "fair market value," "reasonable market value," and "fair cash market value" are substantially synonymous terms and mean the highest price the property would bring free of encumbrances, at a fair and voluntary private sale for cash. At first blush, this crisp and straightforward concept seems rather easy to understand.

I'd now like you to read this same definition with its inherent conceptual fallacy exposed ... and, also, present it in the light of the small-company transaction.

'Fair market value' (FMV) is not designed with any particular individual in mind, nor the 'real' transaction for that matter. FMV is a hypothetical value for the 'model' transaction. The governing conditions in this ideal concept are full knowledge and freedom to act. But in reality, these ideal conditions are rarely present. Emotional and subjective elements often override rational considerations, and full knowledge is something rarely attained by the arm's-length potential buyer who previously has not been involved in the business. Thus, the necessary conclusion is that few buy/sell transactions involving closely held small businesses are done at so-called fair market values. (Summarized from comments of T. S. Tony Leung, C.P.A.)

When my editor at John Wiley & Sons, Inc., Mike Hamilton, asked me to do a book on valuation, I was left with two choices: to write strictly as a technician and be similar to most competing works, or to reach into people-driven factors of how deals really go together as far as pricing is concerned. You will soon learn that this was not really an option for me. And, subsequently, the work of this book is akin to the preceding description by Mr. Leung.

However, the "stage" for inclusive discussion will be less than complete until we bring some of the more commonly found myths surrounding business valuation and pricing into view. I make no attempt to rank these in any particular order or to set precedence in how buyers and sellers might emphasize them during their negotiating processes. All are covered thoroughly in this book, including how these myths can and do creep in to complicate a reasonable and fair settlement on price between the principals in deals.

Myths Commonly Associated with Business Value

Myth #1: The value of a closely held company is based on its "future" earnings.

There is absolutely no question that intrinsic decisions reached by buyers are deeply steeped in the prospects for earning livings beyond the dates of their purchases. But the fact is also that buyers expect to pay no more than the "present value" of those earnings on the dates of those transactions.

Discounted cash flow (DCF) methodologies are developed to analyze values in light of a business's future earnings. Simply described, these formulas consider business earnings for a number of forecasted years into the future; quite often, 10 years are used. Earnings are then "discounted" back to "present" value (value of future earnings stated in today's dollars). I have absolutely no qualms about the basic principle in this formula, and, as evidence of its goodness, it is frequently the method of choice in valuing publicly traded companies. Its use in valuing closely held companies, however, gives me more than moderate anxiety.

General Motors booked over $15 million of sales per clock hour in 1994. Even if sales sputter and are off by a million or so per hour, there is still a whopping annual sales volume left over. According to my studies of recent years, it is estimated that 74% of small, closely held companies in America realize under $1 million of sales per year. Most of these businesses struggle year after year just to make ends meet. For the most part, in valuing small companies, I cannot subscribe to methods that project values based on future earnings for businesses that breathe a sigh of relief when just meeting last year's sales! And I assure you, neither do most buyers. Bear in mind that regardless of what product, service, or entity we sell, ultimately it is the consumer who will decide whether we survive or fold. That consumer of the smaller company's goods and services is quite likely to be inordinately "attached" to the personality and characteristics of a past owner. Detach him or her from the business and what the replacement owner inherits may not be a suitable match in terms of today's value.

Regardless of the benefits I have received from formal education in psychology, accounting, industrial science, and mathematics, I still puzzle occasionally about the use of financial tables, as many expert technicians also do. Formulas, like languages, if not used daily can cause even the competent mind to wander and fail periodically. Try reading the 846 pages in Handbook of Financial Mathematics, Formulas and Tables by Robert P. Vichas (Prentice-Hall), if you doubt my concerns over formula usage! My point: Mastering DCF methodology is beyond the reach of the vast majority of periodic users. Unless the processor routinely and repetitively uses DCF, it is unlikely he or she will be able to collect and consider all the "character" and market variables in the proper light. Future earnings, discounted or not, belong to the owners taking the business into those future events. Thus, the message for sellers is simple-if you want future values, stay with your businesses, make the future happen, and depart when you've reached the target value of choice. The message for buyers is also simple-don't pay prices today that are based solely on future earnings. By the same token, don't buy a business that cannot foresee earnings in the future.

Myth #2: Real property and other hard asset values are always "add-ons" to business cash flow values.

Business "facilities" in the context of enterprise are no different per se from other required operational hard assets in terms of cash flow. In other words, the business "value" treats real estate, owned or leased, in the same way as furniture, fixtures, and equipment for the purposes of the valuation assignment, because facilities are as necessary to the operational function as are equipment and other hard assets. However, one should always appraise real estate as a stand-alone value, because it can often be sold with or without the business and because real estate ownership usually...