Most of the difference lies in the details of the financials. Many small businesses do not prepare monthly financial statements and may not even have professionally prepared tax returns.
Some simple questions you can ask your client are in reference to profitability, is the company making money or profitable? Has the revenue stayed the same as the past couple years or is it significantly different, either up or down? Does the owner receive a salary from the company or possibly distributions? You can also ask whether the company is a start-up or if there are any trademarks, patents or proprietary systems.
What is Fair Market Value? Fair market value as a term has many meanings. As a term in business valuation it has a specific meaning.
There are times when you may need a real estate appraisal expert in addition to a company valuation expert.
Sometimes there is confusion about what is EBITDA or earnings before interest taxes depreciation and amortization. Small business owners also want to know why is an EBITDA multiple important in a company valuation?
Have you ever wondered what you could sell your company for today? Have you considered selling your business and doing something different or even retiring?
One of the approaches business valuation companies will consider when providing a valuation of a company is the "Income Approach".
The income approach considers historical income, future revenues of a company, the earning potential and also capital requirements, or how much will be needed to invest in the building and equipment to support future revenue growth.
There are a couple of ways to look at the potential income of a company. One business valuation method which falls under the Income approach is the discounted net cash flow or DCF method. This method involves projecting the revenues, cost of goods sold, operating expenses, depreciation, working capital and taxes for five to ten years into the future.
The next step is to discount this future revenue stream to the present, which most of you will recognize as a present value calculation. The discount rate is derived from several methods such as the build up model or CAPM for example. The business valuation expert will also have to take into consideration whether this is a control or minority interest and make an adjustment with a control premium or a discount for lack of control. These are business valuation terms...which we discuss in more detail in other videos.
There can also be situations where there are liquidity or marketability issues for stock in closely held businesses. There are discounts for lack of marketability to cover these issues. As you can see there are many steps to consider when valuing a company from the income approach, but at least now you know enough to be dangerous.
If you would like more information on business valuations, methods to value a company or how to find reputable business valuation companies in Chicago, New York or St. Louis call us at 314-541-8163 or you can find additional videos on company valuation issues at http://www.YouTube.com/businessvaluationSTL
There are some common questions business owners ask about valuation discounts when getting an appraisal of their company. What is the discount for lack of marketability?