Precast Consulting Service
Finance, Marketing & Operations


What's my business worth?
I am often asked this question. There are several methods of valuing a business. The method shown here is easily understood, and provides credible results. It is used by many acquisition analysts.

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What are the components of value?  [below is a step by step]

Book Value is easily taken off the financial statements. But it has some shortcomings. First, value on the books usually doesn't reflect market value. Second, it doesn't value the going concern value, the "goodwill".

Liquidation Value, or auction value, applies in a bankruptcy or other forced sale, and by definition, there is no goodwill to sell.

Replacement value is the standard method of valuation of equipment. There is an active market for used equipment. This value must be established by a qualified appraiser, and is defined as a willing seller and motivated buyer, and is based on "as is - where is." As a rule of thumb, this appraised value is typically 50-70% of the cost of new if the equipment is in good condition; less if it is specialized or in low demand, and more if it is like new. In many cases, book value is lower than appraisal value because equipment is often quickly written off on the books for tax purposes.  For appraisals we recommend IWI group (Clay Warner, Larry Isaacson) 770-840-4060

Financial values must be considered for the working capital of the business. For this purpose, each receivable is evaluated instead of reliance on a general reserve for bad debts.  Cash and good accounts receivable are worth 100%. Receivables over 90 and retainage are worth much less.  Finish goods inventory for jobs under contract is worth 100%, but stock inventory, obsolete inventory and leftovers are generally worth much less. In addition, it is not unusual for producers to carry obsolete raw materials inventory on the books and finished goods that need rework before they can go to the job.

Goodwill, or the going concern value, is an essential component of the value of a business. The goodwill of the business is the earning power that is beyond that which can be explained merely by the underlying value of the assets. In many cases, the earnings used for calculation of goodwill is greater than the earnings on the books. The method shown here calculates a realistic goodwill number.

Business value therefore, consists of the replacement value for equipment, plus financial value for the working capital, plus goodwill for the value of the going concern.



Example

Understanding calculation of business value is best illustrated with an example. Please click on example to bring up the financial statements of a typical medium sized producer. You may wish to print these out, and then follow along with the text below.

Income statement This shows a $15 million producer, doing a little better than break-even, and providing almost half a million of cash flow. For purposes of business valuation, the income statement must be shown on the basis that the buyer will use to operate the business. In addition, a buyer will typically want to review up to 5 years of results and use some average value for earnings.


Balance Sheet The illustration shows a moderately strong balance sheet, without excessive debt, and with reasonable owner equity. Receivables are taking about 60 days to collect; there are some over 90 receivables, retainage is significant. Payables are at about 45 days. There is a line of credit secured by the receivables. There is a mortgage. For purposes of illustration, I have made the following adjustments to reflect the value the assets at market value.

Valuation The last page of the example illustrates calculation of the value of the firm.


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>click here for Business Valuation presentation.
  Note: Will take several minutes to load this PowerPoint presentation with a telephone modem.

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