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FOR WHAT IT’S WORTH: HOW AN APPRAISER VALUES YOUR BUSINESS

FOR WHAT IT’S WORTH: HOW AN APPRAISER VALUES YOUR BUSINESS. Presented by Sherry C. Smith To The Rotary Club of Pawleys Island May 3, 2007. Events That May Trigger the Need for a Business Valuation. Estate Planning, Gifting – minority interests Death – step up the basis Sale of Business

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FOR WHAT IT’S WORTH: HOW AN APPRAISER VALUES YOUR BUSINESS

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  1. FOR WHAT IT’S WORTH:HOW AN APPRAISER VALUES YOUR BUSINESS Presented by Sherry C. Smith To The Rotary Club of Pawleys Island May 3, 2007

  2. Events That May Trigger the Need for a Business Valuation • Estate Planning, Gifting – minority interests • Death – step up the basis • Sale of Business • Recapitalization – new equity • Buyout of a Partner – buy/sell provisions • Minority Shareholder Dispute • Employee Stock Ownership Plan (ESOP) • Divorce, Litigation

  3. Drivers of Value • In investment theory, the two drivers of value are risk and return • Higher value = lower risk and/or higher return • Discount rate = the return required by an investor to make a particular investment • Return = true cash return, not income that has been manipulated by tax planning

  4. Context: Look at the Economy, Industry, and Subject Company • What are the prospects for growth? • How risky is it? • How well has the company performed historically? • What are the implications of trends in the economy, industry, and company on: • Revenue Growth? • Operating Profit Margins? • Interest Costs? • Business Risk? • Financial Risk?

  5. Strengths Weaknesses Opportunities Threats SWOT ANALYSIS

  6. Valuation Approach #1: Income Approach • Favorite method of appraisers (when possible) because treats the business as an investment • Best measure for income approach: project future cash flows to invested capital (debt and equity) • Estimate a rate of return appropriate for the business that takes into account the level of risk • Two methods within this approach: Single Period Capitalization Method and Multiple Period Discounting Method

  7. Build-up Method of Determining a Discount Rate and Capitalization Rate

  8. Valuation Approach #2: Market Approach • Guideline Public Company Method – look for close comparables • Merger & Acquisition Method – look for transactions in the marketplace • Direct Market Data Method – statistical, large database, not close comps • Goal is to find appropriate multiples of revenues, or some other measure (cash flow, earnings, etc.)

  9. Direct Market Data Method

  10. Valuation Approach #3: Asset • Usually last choice • The value of the whole business should be greater than the sum of its parts • If not: liquidation • The asset-based approach marks every entry on the balance sheet to market • The Excess Earnings Method (an asset-based method) gives a value for goodwill

  11. So, How to Increase Value • Most importantly, keep good financial records • Increase returns by: • Going after new, growing markets • Seeking advantages over competitors (strong brand recognition, dominant market share, excellent distribution channels, patents) • Lowering expenses • Reduce risk by: • Building management strength • Stabilizing balance sheet • Locking in customer contracts • Diversifying in terms of customers, geography, suppliers

  12. 4420 Oleander Drive, Suite 203 Myrtle Beach, SC 29577 843-839-3763 Sherry C. Smith

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