business law assignment
sharry123
10_business_valuation_2_1.pptxBUSINESS VALUATION & MANIPULATION
What is it worth?
(Dragons’ Den – “Your valuation is ridiculous”)
Bonus question
1
All business valuations are merely仅仅 opinions (ultimate decision maker is market place)
The terms and conditions can dramatically influence price
Value is almost always in the eye of the beholder持有人
Supply and demand changes influence value and price
Value can depend on the experience, education and competence of the appraiser
The validity of the value depends on the veracity of the numbers
Sometimes based on the past and not the future. Buyers are buying a future income stream
The hard truth about business valuation:
Going concern approach – is used for businesses that can generate an appropriate return on their capital for their shareholders/owners – look at net income stream and future trends or “hard asset backing”（most common)
Liquidation approach used for businesses that are not sustainable, to measure downside risk, and where the going concern value is less than the liquidation value
The market approach involves estimating the fair market value of a company based on value relationships and/or activity ratios derived or implied from the analysis of other market transactions that can be applied to the company in question (way of testing validity of first two methods). (least common)
Methods of Business Valuation
Example, imaginary business – post office box to which people send money
Collects about $10,100 per year for 10 years with $100 in expenses (rent for PO box)
What would you pay for this business
Buyer would look at this minimum risk business and compare it to other ways of investing his or her money to earn $10,000 per year
No risk savings account or government treasury bill pays 2-4% per year – lets say 4% - would require an investment of $250,000 ($10,000/.04=$250,000)
Going concern approach – Capitalization rates
The higher the perceived risk, the higher the cap rate % that the buyer will use to estimate value
20% to 25% common for well established small businesses (say 25%)
Calculate net earnings before interest, taxes, depreciation, amortization (“EBITDA”)
Average EBITDA or weighted (say $100,000)
Divide average EBITDA by cap rate ($100,000/.25=$400,000) or
Multiplier = 100/25 = 4, then 4 X $100,000 = $400,000
Capitalization rates/multiplier
Well established/history of strong earnings/good market share = 12% to 20%
Unproven business/volatile market = 25% to 50%
Example: $300,000 EBITDA
20% CR/ value = $1,500,000
35% CR/ value = $857,000
50% CR/ value = $600,000
Importance of going concern capitalization rates:
Capitalization rates:
Generally, the value of a business represents the greater of its liquidation value and its going concern value
A liquidation value approach is used when a business is not considered a going concern, or where it is a going concern and its greater value is related to the liquidation of the underlying assets
Sometimes referred to as “hard asset backing”
Liquidation Method
Review at least 5 years of financial statements
Ask around about their accountant
Review Engagement v. Audit Review
Business valuation is both an art and a science – example is capitalization rate for going-concern valuation
On liquidation values watch the use of book values and depreciation
Difference between personal and commercial “goodwill”
Please note:
Sudden reduction in profits or increases in expenses
Third party transactions and loans
Sudden asset transfers from one co. to another (related?)
Close look at salary expenses
Owner doing business with his own company
Excessive expenditures
Business looks in decline but standard of living the same
Any evidence of fraud
Use of “cost” principle
Under-estimating business value (why?)
Earnings “management” by over accruing estimated restructuring expenses in one period in order to inflate earnings in later periods
Creating reserves in years when earnings are strong in order to increase income in later years (“cookie jar” reserves)
Capitalizing expenses
Any evidence of fraud
“Goodwill” listed as an asset
Is the pension plan a defined benefit plan – many are under-funded
Stock option benefits for executives – other sweetheart deals
Look for large changes in inventory changes – could be “channel stuffing” (moving goods to the market knowing it won’t sell)
Watch for “contingent liabilities” (future liabilities)
Manipulating the timing of an asset sale
Over-estimating business value (why?)
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Gov Bonds
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Chart1
| Gov Bonds |
| Large |
| Private |
| Private |
| Struggling |
| Start- up |
Sheet1
| Rate | |||
| Gov Bonds | 4 | ||
| Large | 10 | ||
| Private | 15 | ||
| Private | 25 | ||
| Struggling | 35 | ||
| Start- up | 50 |
