It is often necessary to calculate the cost of capital when you are trying to make decisions concerning investments or lending. You may also need to show your current cost of capital if you are trying to elicit investments for your company. This is to say that your lenders will want to know your financial standing in order to estimate if the cost to them is even remotely worth the risk.

Three success-generating topics

1.Business Operations Improvement

2.Financial Performance

3.Turnaround Management

(Register to get your Free Sample Report)

There are several specific business models that can be used, but for business valuations, the cost of capital is the RISK associated with any investments or valuation related to the business. The HIGHER the cost of capital the larger the risk and the lower will be the present value of the business.

This calculation of the cost of capital may sound simple, but it is complex due to all of the elements involved. For instance, the bank or loan interest rate is NOT the business Cost of Capital but is only the cost of debt.

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If you want to use true numbers, you must take into account six elements:

1. The risk-free rate
2. The rate of equity
3. The rate for the size of the company
4. The rate of the specific company’s industry
5. The rate for the specific company can include 10 to 20+ elements. The number depends on which formula is selected.
6. Economic conditions

If you do not include all these elements then errors can occur. These errors can be significant. If your company is valued at $5-15 million and an error of 10% in the cost of capital occurs the value can be off by over $1 million to $5 million or 20% to 33%.  It is always best to have a certified valuator assist you in your valuation and the important cost of capital calculation.

Can your company separate itself from others in the marketplace?

Welcome to Part 8 of 10.

Top Ten Tip of Week by Dale S Richards, a Certified Licensed Business Valuator for 20+ years. This week we will address: Know Your Competition – Market and Value Advantage

If you like what you read please be sure and like the page.

Many companies employ a market research firm to examine the competition. This can cost thousands of dollars. My methodology is a proven technique that employs a college student to complete such an analysis.

The method allows the student to receive college credit while providing the company with details about the competition and market. I have used this technique to assist in the commercialization of fifty technologies based in universities, startups, and mature companies that enhance their ability to understand and adjust to the competition.

Competitive Advantage

One of the most important small business valuation ideas is to build a company that provides a service not provided by anyone else. If your company can separate itself from others in the marketplace, this is an instant way to increase your value to potential suitors.

One of the most important small business valuation ideas is to build a company that provides a service not provided by anyone else

Cash Flow

If you generate a solid cash flow, then your cash flow has value. If you create systems that translate tribal knowledge into workable processes, then there is a valuable addition. If there is a document of the process on HOW you generate sales and new customers, then there is added value. These will add cash flow and value. Without systems, your value decreases. Service and professional businesses can increase their value with systems.

TOP TEN WAYS

TOP TEN WAYS TO INCREASE VALUE IN YOUR COMPANY:

Here is a list of my top 10 way to increase value in your company

• Productivity Pyramid TM Goals–Coaching-Accountability–Rewards
• 80/20 Customer “Gold Program” ®
• Performance Dashboards: A/R, A/P, Cash Flow, Contrib. Margin (CM), Productivity $Rev/FTE, $CM/FTE, NI/FTE
• Why Do Customers Buy – Build Brand –
• Rifle vs. Shotgun Marketing ® Approach
• Systems – Processes
• Reoccurring or Recurring Revenue
• Know your Competition – Market and Value Advantage
• Optimize Product Pricing/Profits
• Remove Product Dead Wood –Increase Margins & Profits

Competition Tracking- Proactive & Ways to Increase Value

Competitive Tracking: You can’t stay ahead of your competitors if you don’t know what you are doing.

 80/20 Customer “Gold Program” ® 

How do you expand revenue with existing customers? 80/20 Customer techniques help to raise revenue 2X-4X. Proactively find out what customers’ needs are instead of waiting for them to call.

Not sure of your competitive advantage?  Maybe it’s time for competitive analysis.

Dayna Nuemann, Louisville KY, Learned key business concepts from Dale S Richards’ presentation on Business Valuation Principles – How to Increase Your Business Revenue, Profits and Value 2X because Dale used real-life examples to illustrate the financial topic that could have been boring but he made it fun.

Need help understanding all the different Business Valuation Methods?

Let’s face it, the goal of many business owners is to build a company that can ultimately be sold for a large profit. While this may be the end goal, how to go about doing this can be quite difficult. This is why an entire industry has been created to deal with business sales and acquisitions. Sometimes, entrepreneurs are great at building businesses, but not always at selling them. Entrepreneurs tend to have so much invested in their businesses that they are not able to emotionally detach from the situation. Hiring a business valuation consultant can help bridge this gap and often allow business owners to receive more money for their business than they would have otherwise. There are three primary business valuation methods which are broken down below.

Net Asset Method

When business valuation professionals use the net asset method to value a business they are looking at assets and liabilities to determine the value of a business.  The asset method takes the actual assets minus the liabilities of a business and uses them to determine a fair value for a business.  The trouble with this method is that assets do not always equal value.  For instance, if your company possesses significant intellectual property, these properties may not be completely included in the balance sheet assets.  Another reason is the accelerated depreciation methods may be used on the asset value which lowers the real market value of the asset.  These examples are why business owners should have issues with business valuation methods that focus only on net assets and nothing else when determining the market value for a company.

Market Method

The market approach to business valuation is one of the business valuation methods which attempt to use the free market to determine the value of a business.  This method uses historical transactions to determine what is fair in terms of a sales price for both the buyer and seller.  To effectively complete this type of business valuation, it is important to find comparably valued companies which can be used to help determine the value of the business in question.  This allows valuation professionals to attach a market-driven price to a certain company as opposed to a random number that has no meaning in the actual industry.

Income Method

The income method attempts to take into consideration the present value of the business as well as any risk that could be considered in terms of the future earnings of the business.  This method of valuation attempts to take the expected future earnings and risk and put them in today’s terms.  To do this, the income method uses Capitalization and Discounting to attempt to fairly value a business.  To put it simply, capitalization gives the buyer and seller a factor that can be used to determine future earnings to add to the present value of a business.  The discounting method works a bit differently in that you attempt to project what future income will be on the front end to ultimately come up with a present value for a company.

While it is true that there are several different business valuation methods, they do not have to be confusing.  If you have questions about selling your business, it is wise to enlist the services of a business valuation professional who can give you sound advice as to how to go about selling your business.  These professionals will be able to point you in the right direction in terms of which valuation method to use to sell your business.

Do you wonder how to calculate the cost of capital when you are trying to make decisions concerning investments or lending?

You may need to show your current cost of capital if you are trying to elicit investments for your company. This is to say that your lenders will want to know your financial standing in order to estimate if the cost to them is even remotely worth the risk.

There are several specific business models that can be used, but for business valuations, the cost of capital is the RISK associated with any investments or valuation related to the business. The HIGHER the cost of capital the larger the risk and the lower will be the present value of the business.

This calculation of the cost of capital may sound simple, but it is complex due to all of the elements involved. For instance, the bank or loan interest rate is NOT the business Cost of Capital, but is only the cost of debt.

If you want to use true numbers, you must take into account six elements:

1. The risk-free rate
2. The rate of equity
3. The rate for the size of the company
4. The rate of the specific company’s industry
5. The rate for the specific company can include 10 to 20+ elements.  The number depends on which formula is selected.
6. Economic conditions

If you do not include all these elements then errors can occur.  These errors can be significant.  If you company is valued at $5-15 million and an error of 10% in the cost of capital occurs the value can be off by over $1 million to $5 million or 20% to 33%.  It is always best to have a certified valuator assist you in your valuation and the important cost of capital calculation.

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https://successbiznow.com/free-info/

All this is delivered in 4-6 days vs. 3-4 weeks for competitors from a certified valuation team that has been delivering this quality for 15 years with hundreds of satisfied customers. 100% Satisfaction Guaranteed!!

When using rules of thumb to figure the cost of capital, you have to know that there are certain flaws and errors in rules of thumb that can cost an owner or valuation user large losses and errors. Rules of Thumb formulas are estimations and do not take into account the specific company situations or the specific market conditions. The market conditions change continually and need to be specifically considered. Any number of things can cause the market to change. Economic factors fluctuate daily. Specific business conditions are important facts that influence the cost of capital. Other less frequent situations can also influence the cost of capital such as natural disasters, government policy at home or in other nations, sudden wars, and other politically driven challenges that can alter numbers.

Every investment or cost of capital need must consider all of the risk elements. These include 1) the Risk-Free rate, 2) Equity vs. Debt rate, 3) Size rate, 4) Industry rate, and 5) Specific Company rate.  Economic conditions may also need to be considered. If you only work with Rules of Thumb then all of the specific conditions will not be considered and large errors can occur.

Perhaps the most difficult part of the flaws and errors in the rules of thumb cost of capital is the fact that their use often leads to decisions that can significantly impact the business and lead to detrimental consequences.  Valuation professionals understand the true nature of the risk and develop accurate Cost of Capital numbers that increase the accuracy and correct use that leads to proper valuation calculations. Always use a professional to calculate the proper cost of capital.

The first step to choosing a valuation service provider is to evaluate the package of services offered to determine whether the provider meets your needs. There are several points that should be covered when you begin searching for a valuation service, to ensure that you get the best valuation possible for your business.

Finding a valuation service provider that specializes in the type of valuation you need is the first consideration. When you need a business valuation make sure you choose a service provider that specializes in businesses rather than property or automobiles.

Which type of valuation services do you need? This is an important question and will affect the results and your final choice of provider. Calculation analysis looks at limited information and is often for people who are thinking of selling but have not made a final decision. Limited valuation analysis is common when the owner wants to save money and time for a fairly informed valuation. Full valuation services involve very detailed information as well as a visit from the valuator to provide the most accurate estimate of the value.

Price may also play a part in your choice. Consult with several valuation services providers to find the one that offers what you need and whose costs fit within your budget.

Recommendations from other business people and professionals in the fields of buying and selling are a great way to find the ideal valuation services provider for your needs. Credentials and experience as well as reputation are a large part of getting an accurate valuation.

Choosing a professional valuations service provider is the key to making a profit from your sale or to get a proper investment partner. Take the time to evaluate the valuations services providers around you before choosing one to estimate the value of your business

Let’s face it, the goal of many business owners is to build a company that can ultimately be sold for a large profit. While this may be the end goal, how to go about doing this can be quite difficult. This is why an entire industry has been created to deal with business sales and acquisitions. Sometimes, entrepreneurs are great at building businesses, but not always at selling them. Entrepreneurs tend to have so much invested in their businesses that they are not able to emotionally detach from the situation.  Hiring a business valuation consultant can help bridge this gap and often allow business owners to receive more money for their business than they would have otherwise. There are three primary business valuation methods that are broken down below.

Net Asset Method

When business valuation professionals use the net asset method to value a business they are looking at assets and liabilities to determine the value of a business. The asset method takes the actual assets minus the liabilities of a business and uses them to determine a fair value for a business. The trouble with this method is that assets do not always equal value. For instance, if your company possesses significant intellectual property, these properties may not be completely included in the balance sheet assets. Another reason is the accelerated depreciation methods may be used on the asset value which lowers the real market value of the asset. These examples are why business owners should have issues with business valuation methods that focus only on net assets and nothing else when determining the market value for a company.

Market Method

The market approach to business valuation is one of the business valuation methods which attempt to use the free market to determine the value of a business. This method uses historical transactions to determine what is fair in terms of a sales price for both the buyer and seller. To effectively complete this type of business valuation, it is important to find comparably valued companies that can be used to help determine the value of the business in question. This allows valuation professionals to attach a market-driven price to a certain company as opposed to a random number which has no meaning in the actual industry.

Income Method

The income method attempts to take into consideration the present value of the business as well as any risk that could be considered in terms of the future earnings of the business. This method of valuation attempts to take the expected future earnings and risk and put them in today’s terms. To do this, the income method uses Capitalization and Discounting to attempt to fairly value a business. To put it simply, capitalization gives the buyer and seller a factor that can be used to determine future earnings to add to the present value of a business. The discounting method works a bit differently in that you attempt to project what future income will be on the front end to ultimately come up with a present value for a company.

While it is true that there are several different business valuation methods, they do not have to be confusing. If you have questions about selling your business, it is wise to enlist the services of a business valuation professional who can give you sound advice as to how to go about selling your business. These professionals will be able to point you in the right direction in terms of which valuation method to use to sell your business.

Valuation Metrics and Performance Dashboard Elements  

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Elements to Increase Your Company Value
Financially Part VI

This blog is a continuation of the series on How to increase your business value with financial concepts:

• Financially – Part VI

Today’s blog will present the 12-month rolling graphs and performance dashboard elements

Rolling 12 Month Graphs

Year-to-Date (YTD) financial statements are almost useless until the 4^th quarter.  Almost all financial software programs have YTD as their standard.  A much more effective tool is a 12-month rolling history which can also be used to create a 12-month budget monitor

A 12-month rolling metric tracking system can work on most performance metrics.  It works by adding up the 12 months data and then insert that data point monthly into a graph or other time basis.  For example, if you have a 12-month rolling point and want to add this month (say June) then you add this June into the sum and remove last June’s number.

Valuation Metrics and Performance Dashboard Elements

With a 12 month rolling metric any change in slope is significant because a current month replaces a past year month.  Any change represents a change in the month’s activity rather than waiting for YTD to get to the 4^th quarter.

Valuation – Performance Metric

It is recommended that a business valuation be done every two years.  With the author’s nine methods and calculations, it can be used as a metric for management performance.  Are the net assets improving?  Is the cash flow better?  What impact does that have on the market value method?  If the net cash flow is increasing the statistically projected method will show a rise. The author discusses these nine valuation concepts in his book. “Business Valuation Principles Made Easy with How to Increase Value Financially”.

Financial Reporting Dashboard Elements

Some elements that could be included in a graphical dashboard are shown below. Graphs are much easier to assess the company performance that a series of data tables.  The author suggests the following graphical metrics:

• A/R
• A/P
• Inventory
• Capital
• Overall Cash Flow
• Contribution Margin (CM)
• Break-even Dollars and Units
• Productivity Index: (Rev. $/FTE & CM$/FTE)
• Revenue
• Net Income
• Average Sales Price/Unit

The more valuation calculations with detailed assumptions, the easier it will be to predict company value and help with negotiations. Multiple & complex valuation models – timeliness, responsive, and reporting processes don’t have to be burdensome.

Business Valuation Principles made easy for any executive to understand with insight on How to Increase Your Business Value Financially, Operationally and Strategically. I understand business theory, and I hope to make it easier for you to understand as well. In the process, I try to point out common errors in the valuation process.

I believe KNOWLEDGE IS POWER. I like to detail at least nine different methods to value a business when speaking to businesses and CEO’s. The nine different valuation calculations use three established valuation methods:

• Asset Method
• Market Method
• Income Method

The assumptions from using my methods can reveal how the company may achieve a higher level of performance and value. In a negotiation, an owner can push a higher value by emphasizing the reasons and circumstances that would create that higher value. One value number probably does not tell you the real potential or value of the business. Two to five numbers give you a good range of values and provide solid data sets, to see where the value of your company may be.

It is recommended that a business valuation be done every two years. With my nine methods and calculations, it can be used as a metric for management performance. Ask yourself three basic questions:

1. Are the net assets improving?
2. Is the cash flow better?
3. What impact does that have on the market value method?

If the net cash flow is increasing, the statistically projected method will show a rise. I discuss these nine valuation concepts in my book Business Valuation Principles by Dale S Richards.

Let’s look at some examples: when a certified valuation is needed

1.   Merger or Acquisition: For a merger or acquisition transaction, it is critical that multiple method valuations be completed. KNOWLEDGE IS POWER. If just an Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA), the multiplier is used, what data do you have to increase your knowledge or negotiation power? None.

2.   Financing or Investment: If you are seeking funds or investment partners, a certified valuation is essential to provide the insights these partners would need. Multiple business value calculations will be useful for the transaction.

3.   Estate Taxes or Gift Values: The Internal Revenue Service (IRS) requires a value for any stock that is gifted to heirs. A valuation is also needed for assets and business value for estate taxes. A high-quality valuation firm can provide a comprehensive valuation and report that the IRS can easily follow. Excel Management’s team has provided IRS quality reports for 15+ years that have never been challenged by the IRS. They have accepted the findings because they are clearly explained.

www.successbiznow.com – Press “Valuation” Tab

4.   Purchase Allocation or Fairness Opinion: If you have a transaction or acquisition a Board of Directors or the firms’ partners will often require a transaction fairness opinion. It is important that the two companies are valued on the same comprehensive basis and methods to give an “apples-to-apples” comparison. This will provide the decision makers with the proper documentation to make a fair opinion.

5.   Stock Option Plans: Years ago the IRS would allow stock option value discounts for employees. This is no longer allowed. Stock options granted must have a current market value associated with the “option strike price” to meet IRS guidelines.

6.   Life Insurance: Small businesses should have key person life insurance to reduce loss risk associated with key employees. A certified valuation is the best option to determine the life insurance and protection needs.

7.   Buy/Sell Agreements: Partnerships or joint ownership arrangements usually do not last forever. It is important, up front, to establish a succession plan with specific certified valuation methods and plans to assess the company value when a partner change is needed.

8.   Tax vs. Value Tool Box: In privately held companies there may be various expenses that provide a tax advantage but should be tracked and added back into the net cash flow for the valuation Income Method. If a transaction is considered, it makes the due diligence process go smoother if the toolbox items are tracked in the profit and loss statement or a spreadsheet.

Dale Richards taught Valuation & Negotiation skills in Vermont.

Jack Russell, Century 21 is in the process of negotiation and was very pleased and appreciative of Dale’s insights on Valuation Principles and how to use the many calculations that Excel Management provides to provide Knowledge is Power in any negotiation. Dale taught key business concepts on Business Valuation Principles – How to Increase Your Business Value, Financially, Operational and Strategically.

DETERMINING THE VALUATION OF STOCK OPTIONS IN YOUR BUSINESS

There are two primary purposes for stock options. One is part of an employee benefits package and the other is to pay for goods and services to help companies retain cash. Both of these purposes are valuable and beneficial to both the company and to the recipients. No matter which reason the stock is being used it is important that the issuer knows the value of what they are “paying or giving” away and that the recipient has an idea of the value they hold. A certified valuation service is a very specific field that uses a variety of techniques and strategies to determine the value of stock options.

The first step to determine the value of stock options is to determine the value of the company and the overall stock (equity element) value. Only then can a valuator apply the options valuation models to determine the actual stock options package value. Keep in mind that the overall stock value is not the same as a stock option value.   This makes it possible for employees to clearly know the value of their benefits package and enables the employer to adjust packages to compensate employees at different levels. When using stock options as compensation for goods and services the stock options valuation ensures that the value is commensurate with the goods or services received.

Without a certified valuation service, it can be difficult to ensure that a company is providing a valuable benefit to employees or is adequately paying for goods or services by offering stock options. The IRS usually now requires an independent valuation of stock options when they are issued and exercised. A typical business owner is not prepared to apply valuation models and tackle the financial and mathematical calculations required to determine the best valuation model to use. Let the professionals help you find out the value of your stock options so that you can be sure that you conform to IRS guidelines, adequately compensate employees, or are adequately compensated services and goods providers.

Marketability Discount – “The concept of marketability deals with the liquidity of the interest—how quickly and certainly it can be converted to cash at the owner’s discretion. ”Source: Chapter 6, Fundamentals, Techniques & Theory, National Association of Certified Valuation Analysts (NACVA)    

“We will define Marketability as the ability to convert the property to cash quickly, with minimum transaction and administrative costs in so doing and with a high degree of certainty of realizing the expected amount of net proceeds”. Source: Valuing Small Businesses & Professional Practices, Pratt, Shannon P., McGraw-Hill, New York, 1998.

According to materials presented by NACVA, discounts for a lack of marketability (as determined by court cases) have ranged from 10% to 52%. A great deal of research has taken place over the years to understand this discount and to determine acceptable or normal ranges for various types of companies. This report has taken advantage of more recent studies completed in

The discount for lack of marketability (DLOM) can mean a significant reduction in the value of your stock based on its ability to be marketed adequately. This is one of three discounts that needs to be taken into consideration for an overall stock, equity and business valuations. There are several key points that a certified valuation expert will consider when trying to estimate the discount for lack of marketability.

·        Are there potential buyers in the industry?

·        Has the company been approached by any potential buyers?

·        Is there a current opportunity to liquidate the equity stock or units?

·        Has the company produced sufficient earnings to be a potential target of acquisition?

·        What is the consistency and size of the revenues?

·        What is the revenue growth and the stability of that growth?

A certified valuation service can use the information above to help give you an accurate value of your stock, units, and business and the amount of the discount for lack of marketability.

In general, the faster and easier a potential equity element can be liquidated, the lower the marketability discount. A certified valuator will take into consideration the above elements to determine the lack of marketability discount is appropriate for your business.

What is the Company Specific Cost of Capital?

The Cost of Capital typically used for a business valuation is the Ibbotson’s Build-up method which comprises several risk factor elements discussed in a previous article.  What method or calculation do you use for your company-specific risk factor for the cost of capital?

Company Specific Risk Factors

A potential major portion of the overall risk and cost of capital is the risk associated with the specific subject company. For the Company-Specific Risk formula derived by NACVA’s certified valuator, Mr. Richards, there are ten specific risk factors used to determine specific risk related to the management and operations of the Company. These ten factors provide a summary perspective of the various risks to potential investors or buyers inherent in the operations and of small privately held businesses. Seven of the factors are directly related to the prospects of business success, and the last three are direct measurements of that success.

To assess the level of that risk, a four-stage scale has been developed. The level of risk associated with each factor is then measured using selected criteria to find the Subject Company-Specific Risk Factors. When appropriate each factor may be weighted to emphasize added risk associated.

Discussion of Company Risk Factors – The list below shows the summary of the ten elements used to determine company specific risk.

1. Depth and quality of management
2. Importance of key personnel
3. Stability of the industry
4. Diversification of the product lines
5. Diversification of the customer base
6. Diversification and stability of suppliers
7. Geographic location
8. Earnings stability
9. Earnings margin
10. Financial structure

The cost of capital is one of the single most important elements of consideration in a business valuation. Errors in the cost of capital can cause significant errors in the value of a business. If your company is valued at $5-15 million and an error of 10% in the cost of capital occurs the value can be off by over $1 million to $5 million or 20% to 33%. It is always best to have a certified valuator assist you in your valuation and the important cost of capital calculation.

I’ve worked in valuations for decades. Many have asked me, why would you need a business valuation? For starters:

• Employee Stock Option Plans.
• Merger/Acquisition
• Partial Business Buyout
• Financing or Investing
• Estate and Gift Tax
• Purchase Allocation
• Fairness Option
• Litigation Avoidance
• Life Insurance
• Shareholder Agreement
• Tax Considerations
• Buyer/Seller Agreements

You see that business valuation is needed for many business related items. Valuation can be a huge task and we know that.

A few Valuation Basics:

Maybe you are new to the business world or never needed a business valuation until now. Read on to learn the basics of what valuations are.

Valuation is a simple term to define; it is the process of estimating what something is worth. This could refer to you personally, your business, or even a patent.

Business valuation is a process and a set of procedures used to estimate the economic value of an owner’s interest in a business. Business valuation is used by financial market participants to determine the price they are willing to pay or receive to perfect a sale of a business.

In finance, valuation analysis is required for many reasons including tax assessment, wills and estates, divorce settlements, business analysis, and basic bookkeeping and accounting, which can be managed with software like GeekBooks. Since the value of all things will fluctuate over time, valuations are as of a specific date. Valuations do not last forever; you will need to get them whenever a big event comes up. Remember value always changes.

There are many reasons why someone would need a valuation done. Maybe you are selling your business. When you sell a valuation will need to take place to determine how much your company is actually worth.

If your company is getting to the stage where you want to buy out a company or maybe complete a merger. You will need a valuation for that.

Personally, you will probably purchase life insurance someday or maybe that time is now. You will need a valuation to determine how much you are actually worth. In sorting out life insurance, you may want to Learn Why A.M. Best Ratings Are Important Here to help you come to a decision on which provider to go with.

Attendees Praise Dale Richards Valuation Interactive Delivery & Content. Zeid Ammarie, New Orleans, Restaurant Owner, said Dale’s interactive delivery was very enjoyable and the content has him thinking of ways to increase his revenue, profits, and value. Great Job Dale!!

Rules for Minority Discount in Business Valuations

Minority Interest Discount – The concept of minority interest deals with the relationship between the interest being valued and the total enterprise, based on the factors discussed. “The primary factor on the value of the minority interest in relationship of the minority shareholder interest to the total shareholder interest and how much control the minority interest does have over the particular entity.” Source: Chapter 6, Fundamentals, Techniques & Theory, National Association of Certified Valuation Analysts :   (NACVA)    

The lack of control regards an interest holders inability to make decisions regarding important management and policy actions; such as those listed below, all of which affect the profitability and therefore the value of the company.

§  Appointment of management

§  Management compensation and perquisites

§  Company policies and the course direction of the business

§  Acquisition and liquidation of assets

§  Selection of customers and awarding of contracts

§  Liquidation, dissolution or recapitalization of the company

§  Selling or acquisition of treasury shares

§  Registration of company stock for public offering

§  Declaration and payment of dividends

§  Changes to corporate article or bylaws

A minority discount applies when a person or company owns less than a controlling portion of the interest of the company. For instance, when 2 people each own 50% of the interest of a company, no minority discount rules apply because no one owns less than the controlling interest if the company.

Over the past 13 years three major studies have been conducted to determine the appropriate minority discount. Minority Ownership Interest Discounts range between a Low of approximately 13.8% to a High of 40.0%. The value selected depends on the degree of control that is held with the block of equity being valued based on the factors listed above.

If three people owned a portion of the company dispersed as 50%. 49%, and 1%, only one person has controlling interest whereas two people would have a tied controlling interest if they voted together on an issue. Hence the person who own 1% and the person owning 49% would not actually have 1% or 49% of the value of the company separately because his or her stock has no controlling interest. Their stock would be less marketable than the 50% owner because they have no controlling interest. The person with 50% still has controlling interest because the company is now divided in three and that person would control. Any block of equity being valued that has over 50% ownership would not have a minority discount applied in a business valuation.

The more valuation calculations with detailed assumptions, the easier it will be to predict company value.

The assumptions can reveal how a company may achieve a higher level of performance and value. In a negotiation, an owner can push a higher value by emphasizing the reasons and circumstances that would create that higher value. One value number potentially does not tell you the real potential or value of the business. Two to five numbers give you a good range of values and provide solid data sets, to see where the value of your company may be.

Build Systems Early On

If you generate a solid cash flow, then your cash flow has value. If you create systems that translate tribal knowledge into workable processes, then there is a valuable addition. If there is a document of the process on HOW you generate sales and new customers, then there is added value. These will add cash flow and value. Without systems, your value decreases. Service and professional businesses can increase their value with systems.

Build Systems Early On.

Valuation is a lot more than hocus-pocus.

There is a lot of science and some art in valuation. The net cash flow (benefit stream) present value calculation is all science. The discount factor has science and assumptions. There is variability in the valuation calculations because of risk and assumptions.

There are three main valuation methods:

·      Asset Method

·      Market Method

·      Income Metho

Each method above is valid with significant documentation for correct application and use. No one number is absolute. Thus, I generally provide up to nine ways to view a business value to provide the greatest perspective possible to help the business achieve their valuation objectives.

How to Increase your Business Value and Valuation Principles, helped Mihai Simon, President, ETG Security Systems, Denver , CO, to plan ways to raise capital (Business Plan Concepts), and improve his business operations from Dale Richards’ presentation on Business Valuation Principles – How to Increase Your Business Value, Financially, Operational and Strategically.