1. WHAT IS THE VALUE
OF YOUR BUSINESS
© Vladimir Hulpach, P.O.Box 17005, Fountain Hills, AZ 85269, USA

2. Do You Want to Know What Is Your
Business Net Worth?
Common approach:
I will be concerned about my business net worth when
there is a “need” for a valuation.

3. Needs for a valuation do come up!
Common Examples:
 Sale of a business
 Mergers and acquisitions
 Estate and gifting
 Succession planning
 Insurance
 Financing

4. Why and When Should You Care
Responsive Approach
Previous examples =
mostly forced by circumstances.
Proactive Approach
Allows to fix a price or set
methods to determine business
value in planning for
foreseeable events:
• Buy/Sell Agreements
• Family Business
Succession
• Insurance
• Stock Options
• Trigger Value
Are we able to predict
situations dictating a need
for business valuation?

5. Can We Influence the Business Value?
Negligible Influence - Examples:
• Inflated salaries
• Non-recurring expenses
• Non-related assets
Essential Influence - Examples:
• Growth rate
• State of the industry
• Position among competition
Using the Momentum:
• Global and local economic
outlook
• State of capital markets
• State of the industry
• Current competitive position of
the Business
Understanding the
Factors
Timing of the Valuation

6. Introduction into the Valuation Process
Illustration – A value of a traded security
Analogy of valuation techniques – elements missing:
 Free marketability
 Adequate comparables
Valuation by a definition (mostly “FMV”)
Valuation vs. Appraisal
Use of Third Party Appraisals (art, collectibles, antiques, jewelry, real estate,
machinery and equipment)

7. Valuation Methods
Valuation by Purpose:
 Sale, purchase or transfer of a business
 Mergers and acquisitions
 Shareholders transactions, buy/sell agreements
 Employee benefit plans, stock options
 Valuation of insurance
 Estate taxation and estate planning
 Gift taxation, charitable contributions
 Loan applications, collateral valuations
 Solvency/insolvency opinions
 Purchase price allocation (FAS 141R)
 Goodwill impairment (FAS 142)
 Bankruptcy determinations (liquidation value, NOL)
 Marital dissolution

8. Valuation Methods (continued)
Standard of Value:
 Fair Market Value
 Fair Value
 Synergistic Value
Premise of Value:
 Book Value
 Going Concern Value
 Liquidation Value
 Replacement Value
Effects of Purpose of Value on Conclusion of Value:
Obvious interest of the owner (gifting, sale)
×
FMV, 3rd party expert opinion, IRS scrutiny

9. Some Myths about Valuation
„Valuation of a private business should be only be performed when the
business is ready to be sold or a lender requires it as part of its due
diligence process.“
If this is the first-time valuation, usually:
 Resulting Value < Optimum Value
 Planning issues and taxation benefits have not been addressed
Benefits of critical planning:
 Business
 Tax
 Ownership
Examples:
 Value of Loan Collateral
 Estate tax
 Buy/Sell Agreements secured by Life Insurance

10. Some Myths about Valuation - continued
„Businesses in my industry usually sell for two times annual revenue,
why should I pay someone to elaborately value my business?“
Quick estimates using various multiples (Revenue Multiple, Net Income/Profit Multiple...):
What do the Multiples tell us?
Source: Pratt´s Stats
2012 Real Net Revenue Multiples
Where exactly does a firm within the industry, with $2,000,000 in revenues fit?
What your business is worth today generally depends on:
 How much cash it generates today
 Expected growth in cash in the foreseeable future
 The return buyers require on their investment in your business
Industry Year Min. Max. Average Median
Auto – Parts 2012 0,93 8,30 2,91 3,18

11. Some Myths about Valuation - continued
„My business loses money, so it cannot be worth much.“
Fact: Most private businesses appear to lose money.
Financial statements reflect an array of discretionary and non-standard items.
Examples:
 Salaries
 Accelerated depreciation
 Value of intangible assets
 Non-business assets
 Need to normalize financial statements
(duty of a valuation analyst)
NORMALIZED FINANCIAL STATEMENTS
+
OTHER ELEMENTS OF THE VALUATION PROCESS
↓
REALISTIC VALUE

12. The Valuation Process
Methodology by NACVA (National Association of Certified Valuators and Analysts):
1. Value Estimate Assignment
• Description of Assignment
• Purpose and Function of Valuation
• Standard, Premise and Level of Value
• Methods of Valuation
• Value Estimate Key Assumptions
• Limiting Conditions
• Executive Summary
2. Company Overview
• History and Background
• Capital Structure
• Management and Personnel
• Facilities and Equipment
• Products and Services
• Other
3. Economic Conditions
• Global and/or US Economic Outlook
• Regional and Local Economic Conditions

13. The Valuation Process (continued)
4. Comparative Analysis
• Industry Overview
• Company’s Position in the Industry
• Qualitative Factors Affecting the Value (SWOT)
5. Financial Analysis
• Financial Information
• Balance Sheet Analysis
• Income Statements Analysis
• Cash Flow Analysis
• Ratio Analysis
• Normalizing Adjustments
6. Valuation Methods and Findings
• Asset Approach
• Market Approach
• Income Approach
7. Valuation Adjustments
• Control Premium or Minority Discount
• Lack of Marketability/Liquidity Discount
• Other Premiums and/or Discounts
8. Reconciliation and Conclusion of Value

14. The Value of Intangibles
Intangible assets may represent an important part of your business’s value!
Your business = typically a collection of assets of different nature:
Tangible Assets:
 Cash & Cash Equivalents
 Receivables
 Inventory
 Investments
 Property, Plant and Equipment
Intangible Assets:
 Patents
 Trademarks
 Copyrights
 Brand Recognition
 Workforce in Place
 Customer Lists
 Goodwill

15. The Value of Intangibles (continued)
What is Goodwill?
Typically goodwill = a residuum: When a business is sold for a price
higher than Fair Market Value, goodwill represents the difference.
„Goodwill is a proclamation of the new management about how it will
use the acquired assets in a way impossible for the previous owner.“
Synergy example: A hotel chain buys an independent golf course.
Acquired Goodwill (on the books)
x
Hidden Goodwill (built-in)
Not amortized but tested for impairment
Different approaches to valuation of Intellectual Property:
 Income vs. cost methods (patents)
 Comparative methods (effective royalty rate)
 Substitution methods (workforce value)
 Projection - distribution simulation

16. Planning an Exit Strategy
The benefits of understanding
 Factors determining the value → maximize the value
 Structure of the value → asset separation, tax strategies
Advantages of a family business in Exit Strategy Planning!
Sale of Business
Preparation for a sale of a business:
 Learn about comparable transactions
 Recognize the market conditions
 Optimalize the business operations
 Normalize financials and/or adjust practices
 Invest in the company?
 Estimate tax implications
 Select the sales and marketing tools

17. Planning an Exit Strategy (continued)
Mergers and Acquisitions
Pros and Cons
Loans and Private Equity
The Wall Street Journal - April 2014: ”Direct lending takes off in Europe“
Interest of global investors – private equity funds - examples
Succession Planning
 Buy/Sell agreements
 Third party purchase options
 ESOPs
 Use of insurance
 Quick estimates of value for succession planning
Tax Strategies
 Gifting
 Charity
 Other tax deductions
Keep track of your business’ s net worth!