Generational Equity

Generational Equity

Find out what it's actually
worth.

Find out what you should actually pay for the business. When
you're buying a used car, this is a simple matter of comparison shopping, but
business valuation is considerably more complicated. It's common in business
valuation to use several different methods of business valuation to arrive at a
price. When preparing the asset list (spec sheet), for instance, the seller
could have used:

* Book Value (based on the company's balance sheet),

* Modified Book Value (book value adjusted to reflect the current market
value of the assets),
* Replacement Value (based on what it would cost to
replace the asset),
* or Liquidation Value (based on what the asset would
bring in if the business was liquidated).

He may also have incorporated
some Earning Value methods into the business valuation process to arrive at his
final asking price.

Before you buy a business, you want to know how the
seller arrived at his estimate of the business' value, and arrive at your own
estimate of how much the business is worth. The important "how to buy a
business" point is that a business is not worth x amount of dollars just because
the seller says so.

Remember that the real value of the business depends
upon the income that the business generates. Examining the business' financial
records should have given you an accurate picture of the business' gross
revenues, costs, and profit. You want to buy a business based on the return on
investment, not on the stated price. In other words, what you are really buying
is the annual profit.

If you're having trouble figuring out what the
business you want to buy is actually worth, seek advice from a professional
business valuator.

ips Before Conducting a Business Valuation

#
Value is relative. Just as your business is unique, so too is its structure and
value: Your cash flow may be strong, but your earnings may be below industry
average. Or perhaps you have valuable intangible assets, such as a loyal
customer base or patents. The process can be subjective and influenced by
factors that a seller can't control, such as industry forecasts and the economy.

# Get started early. You will want to conduct a business valuation years
before a sale, particularly if you want to increase earnings or cash flow in
order to raise the asking price. You'll need to show the last three years of
financial statements to a prospective buyer, so valuing your company four or
five years prior to a sale is a good strategy if you want to increase its value
prior to eventual sale.

# Do your homework. Because business valuations
are often complicated and different methods are preferred in different
industries, it's best to research valuations thoroughly and employ financial
advisers – particularly business valuation specialists – before proceeding with
a sale. To find an appraiser, check with other small business owners, including
competitors who may want to buy your business or the American Society of
Appraisers.

Generational Equity Co

Global Valuation has completed
appraisals of Las Vegas-style megaresorts and casinos; master-planned resort
communities; resort hotels; golf courses; marinas; vacation homes; islands;
mines and quarries; theme parks; cruise ships and terminals; international
airports; regional shopping malls; power plants, natural resources and major
businesses.

Global Valuation always provides credible, accurate and
timely appraisal reports which are completed by State-Certified Appraisers and
members of The American Society of Appraisers (ASA) and the Appraisal Institute
(MAI). These two international organizations, which are members of the Appraisal
Standards Board, are among the eight major appraisal societies that founded the
Appraisal Foundation in 1987.

The two primary most widely used and
accepted types of valuations are asset value and income value.

*

Asset valuations consider the business to be a collection of assets that
have a marketable value to a third party in an asset sale. Asset valuations are
typically used for businesses that are ceasing operation and for specific types
of businesses such as holding companies and investment companies. Asset
valuation methods include the book value method, the adjusted book value method,
the economic balance sheet method, and the liquidation method.
*
Income
valuations are based on the premise that the current value of a small business
is a function of the future value that an investor can expect to receive from
purchasing all or part of the business. Income valuations are the most widely
used type of valuation. They are generally used for valuing small businesses
that are expected to continue operating for the foreseeable future. Income
valuation methods include the capitalization of earnings method, the discounted
future income method, the discounted cash flow method, the economic income
method, plus other formula methods.

Generational Equity Business Make sure your house is in
order.

When you're selling your business, you need to be especially
careful not to let things slide. In fact, this is the time that making the extra
effort to keep things in tip-top shape can really pay off. Think again of
selling a house; like a house that's up for sale, you want your business to show
well.

So whether you have any interest left in running the business, you
need to make sure that you are keeping the business's records up to date, the
inventory up and the premises maintained. People want to buy thriving
businesses, not neglected ones.

You'll also want to be sure that you've
reduced your liabilities as much as possible, doing things such as settling any
lawsuits and making sure all tax payments are up to date.

Rule of Thumb
Methods
Quick and dirty methods based on industry averages that help give a
starting point for the valuation. While not popular with financial analysts,
this is an easy way to get a ballpark on what your business might be worth. Many
industry organizations provide rule of thumb methods for businesses in their
industry.

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