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THE ABC’S OF BUSINESS
VALUATION
Jim Turner, C.P.A. CVA
Turner Business Appraisers & Advisors
SEMINAR OBJECTIVES
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You will learn how to utilize the 3 established
approaches to value a business and we will estimate
the value employing a good rule of thumb
By the end of our session you will understand the
basic steps required to calculate the value of a
business….Valuation is both an Art and a Science
We will discuss the nuances of valuing businesses;
including marketability discounts, normalizing
adjustments and the concept of control
BUSINESS VALUATION & THE BABY BOOMERS
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75 Million baby boomers
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7 Million own privately held businesses
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It is forecasted that between 1.36 and 2 million firms will be
for sale in the next five to ten years
United States birth rate (births per 1000 population). The red
segment from 1946 to 1964 is the postwar baby boom.[2]
WHY VALUE A BUSINESS?
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Buy/Sell decisions
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Gift or Estate Tax (IRS)
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Shareholder actions
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Equitable distribution
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Key man or Key Woman Life insurance
WHO ARE THE EXPERTS
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ABV = Accredited in Business Valuation
CVA = Certified Valuation Analyst is a CPA, MBA,
Ph.d or Degreed Financial Professional
ASA = An Accredited Senior Appraiser
APPROACHES TO VALUING A BUSINESS
The established approaches to value IRS Revenue
Ruling 59-60
 Income Approach
 Market Approach
 Asset Approach
Sanity Check/Quick estimate
 Rules of thumb
SAMPLE BUSINESS VALUATION
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Purpose of the valuation – The owner is
contemplating selling the business; so he wants
to know the fair market value of the business in
exchange
Common deal terms of a small business
transaction

Asset Sale
Includes: Equipment, inventory and goodwill
 Does not include: Cash or accounts receivable
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THE AMERICAN DREAM
Living the
Dream!
OUR ENTREPRENEURS
SAMPLE BUSINESS VALUATION
SAMPLE BUSINESS VALUATION
SAMPLE BUSINESS VALUATION
INCOME APPROACH
SAMPLE BUSINESS VALUATION
IBBOTSON BUILD-UP METHOD
Source: 2013 Ibbotson® Stocks, Bonds, Bills and Inflation Valuation Yearbook, Morningstar, Inc., Chicago,
Illinois.
SAMPLE BUSINESS VALUATION
INCOME APPROACH
SAMPLE BUSINESS VALUATION
MARKETABILITY DISCOUNT
(INCOME APPROACH)
SAMPLE VALUATION MARKET APPROACH
PRATTS STATTS® DATABASE
SIC:5812/NAICS:722515
SAMPLE VALUATION MARKET APPROACH
SAMPLE VALUATION ADJUSTED
NET ASSET VALUE APPROACH
The appraised fair market value of the equipment was $60
SAMPLE BUSINESS VALUATION
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Summarized results table
Based upon the results of the 3 approaches to value;
our opinion of value for the subject company is $1,500
SANITY TEST
SANITY TEST CONTINUATION
USING RULES OF THUMB
RULES OF THUMB
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The single best source for rules of thumb for small
business is the, “Business Reference Guide,”
published by Business Brokerage Press
Pricing multiples: multiples of EBITDA or SDE
Sellers discretionary earnings is earnings before interest,
taxes, depreciation and amortization plus one owners
salary or “EBITDAOC “
– Multiple of sales
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RULES OF THUMB
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Restaurants --- Limited Service (NAICS 722211)
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Rules of Thumb
30 to 40 percent of annual sales for independents; 45 to 60
percent for many franchises---plus inventory
 1.5 to 2.5 SDE (Sellers Discretionary Earnings) plus
inventory

Source: West, Thomas L., 2013 Business Reference Guide,
“Published by Business Brokerage Press.” Page-689
RULES OF THUMB
*Rule of Thumb #1
is in harmony with
the results of the
income approach
and our opinion of
value - $1,500.
PART II – THE FUTURE AFFECTS
VALUE TODAY
INDUSTRY INDICATORS
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US consumer spending on services, a measure of
demand for specialty eateries, rose 1.9 percent in
August 2013 compared to the same month in 2012.
US personal income, which drives consumer
spending at specialty eateries, rose 3.7 percent in
August 2013 compared to the same month in 2012.
US retail sales for food services and drinking
places, an indicator of specialty eatery sales,
increased 3.8 percent in the first nine months of
2013 compared to the same period in 2012.
http://subscriber.hoovers.com.proxy183.nclive.org/H/industry360/overview.html?industryId=1445
INDUSTRY GROWTH FORECAST
First Research forecasts are based on INFORUM forecasts that are licensed
from the Interindustry Economic Research Fund, Inc. (IERF) in College Park,
MD. INFORUM's "interindustry-macro" approach to modeling the economy
captures the links between industries and the aggregate economy.
Source:http://subscriber.hoovers.com.proxy183.nclive.org/H/industry360/overview.html?industryId=1445
FEDERAL RESERVE BEIGE BOOK
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Fifth District--Richmond Beige Book -October 16, 2013
District economic conditions improved modestly,
on balance, since our last report.
Source: http://www.federalreserve.gov/monetarypolicy/beigebook/beigebook201310.htm?richmond
NORTH CAROLINA ECONOMIC OUTLOOK
SUMMER 2013
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Executive Summary: A Return to Growth, and the
Old Issues
Economic improvement is expected to continue in
North Carolina in the second half of 2013 and in
2014.
Nationally, 2 million payroll jobs will be added in
2013, and 2.5 million payroll jobs will be added in
2014, thereby lowering the jobless rate to 6.8% at
the end of 2013 and 6.2% at the close of 2014.
Source: http://ag-econ.ncsu.edu/sites/agecon.ncsu.edu/files/faculty/walden/nceconomicoutlooksummer2013.pdf
CHARLOTTE MSA ECONOMY
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The Charlotte-Concord-Gastonia area economy grew by
nearly five percent in real terms in 2012 making it the
29th fastest growing out of 381 metropolitan areas in
the country.
This growth was broad-based and propelled by
strengthening financial services and durable goods
manufacturing among others.
Source:http://www.nccommerce.com/LinkClick.aspx?fileticket=5USMpqUbpJU%3d&tabid=3466&mid=9134
THE ABC’S OF BUSINESS VALUATION
SAMPLE #2
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What if the business is expected to experience
revenue and profit growth in subsequent years?
Sample 2 revenue & expense growth assumptions:
SAMPLE-2
WITH 4-5% ANNUAL GROWTH
SAMPLE -2
DCF WITH FORECASTED 4-5 %
ANNUAL GROWTH RATE
PART III – “APPLES TO APPLES ”
COMMON SIZE ANALYSIS
COMMON SIZE BALANCE SHEET
*Source: https://www.profitcents.com/USEN/runreport/generatereport.aspx?GUID=40b10acb-4149-4d43-9b7ccbd4b6e1e2f2
COMMON SIZE INCOME STATEMENTS
*Source: https://www.profitcents.com/USEN/runreport/generatereport.aspx?GUID=40b10acb-4149-4d43-9b7ccbd4b6e1e2f2
Checking the pulse of
a business: Key
Financial Ratios
LIQUIDITY
A measure of the company's ability to meet
obligations as they come due.
= (Cash + Accounts Receivable) / Total Current Liabilities
PROFITS & PROFIT MARGIN
A measure of whether the trends in profit are
favorable for the company.
= Gross Profit / Sales
ASSETS
A measure of how effectively the company is
utilizing its gross fixed assets.
= Net Income / Total Equity
OVERVIEW OF I&N, LLC.
RATIOS COMPARED TO INDUSTRY PEERS
Rating
Metric
LIQUIDITY
PROFITS &
PROFIT
MARGIN
SALES
BORROWING
ASSETS
Source: https://www.profitcents.com/USEN/runreport/generatereport.aspx?GUID=40b10acb-4149-4d43-9b7ccbd4b6e1e2f2
PART IV – “NORMALIZING”
IS
AN EFFORT TO ADJUST TAX OR
GAAP BASIS FINANCIALS INTO
ECONOMIC REALITY
It is widely accepted that most financial statements often
paint a picture that is different from economic reality*
Highly aggressive expensing policies to reduce income taxes
Excessive or insufficient compensation to owner(s)
Lavish perquisites (perks) paid to the owner(s)
Leases (Capital vs. Operating)
Source: “Business Valuations: Fundamentals, Techniques and Theory,” 1995-2009 National
Association of Certified Valuation Analysts 2009.v3, page-3-3
SAMPLE #3
NORMALIZING ADJUSTMENT TO OWNERS
COMPENSATION
NORMALIZED NET CASH FLOW
SAMPLE #3
CAPITALIZATION OF EARNINGS METHOD W/WAGE
NORMALIZING
CONCLUSION
Fifty-one percent is usually one-hundred percent
better than forty-nine percent.
 Peanuts, popcorn, cotton-candy,
cigarettes….discount for a lack of marketability
 Render unto Caesar that which is Caesars
(normalizing adjustments)
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OUR
ENTREPRENEURS
AFTER THE SALE