Small Business Valuation Methods: How to Evaluate Small, Privately-Owned Businesses

Description

Valuation is the natural starting point toward buying or selling a business or securities through the stock market. Essential in wealth management, the valuation process allows the measurement of the strengths and weaknesses of a company and provides a historical reference for its development. This guide on valuation methods focuses on three global approaches: the assetbased approach, the fundamental or DCF approach, and the market approach. Ultimately, this book provides the basics needed to estimate the value of a small business. Many pedagogical cases and illustrations underpin its pragmatic and didactic content. However, it also contains enough theories to satisfy an expert audience. This book is ideal for business owners and additional players in the business world, legal professionals, accountants, wealth management advisers, and bankers, while also of interest to business school students and investors. Preface A Practical Book The Target of the Book The Purpose of the Book The Limits of the Book Practical Reading of the Book Contents About the Author List of Figures List of Tables 1 Enterprise Value, Company Value, and Other Essential Financial Data 1.1 Definition of Two Essential Aggregates 1.1.1 Enterprise Value 1.1.2 The Fair Market Value of Equity 1.1.3 Case Study Showing the Differences Between the Two Aggregates 1.1.4 Fundamental Equations 1.1.5 Market Efficiency and Behavioral Finance 1.2 The Strategic Positioning of a Company 1.3 Method Comparison and a Few Recommendations 1.4 Key Takeaways and Limitations References and Further Reading 2 Asset-Based Approach to Valuation 2.1 The Net Worth of a Company 2.2 Adjusted Net Asset Value Method 2.2.1 Essential Income Statement Adjustments Adjustments Due to Under-Investments The Business’s Owner Remuneration or Compensation Package Lease Payments and Rents Exclusion of Non-recurring Items Case Study of a Normalized Income Statement 2.2.2 Essential Asset Adjustments The Net Book Value, an Imperfect Valuation Measurement The Value of Intangible Assets Leased Assets on the Balance Sheet Real Estate Valuation Review Goodwill Impairment 2.2.3 Essential Equity and Liability Adjustments The Fair Market Value of Loans Convertible Bonds Reclassified as Equity Provisions Reclassified as Equity or Debt Off Balance Sheet Liabilities Minority Interest of Non-controlling Interest 2.2.4 Case Study of a Family Owned Real Estate Investment Company 2.2.5 Adjusted Net Asset Value Case Study 2.3 The Capitalized Excess Earnings or Goodwill Method 2.3.1 Intangible Assets and Goodwill 2.3.2 Implementation of the CEEM or Goodwill Method Excess Net Earnings Excess Operating Earnings Excess Earnings Duration 2.3.3 Goodwill Valuation Case Study Company Euphoria Financial Details Excess Net Earnings Method Excess Net Operating Earnings Method Findings and Conclusion 2.4 Key Takeaways and Limitations References and Further Reading 3 Fundamental Value or DCF Approach to Valuation 3.1 Fundamental Value Definition 3.2 The Two-Stage DCF Method 3.3 Generalities on the Forecast and Scenarios 3.4 Free Cash Flows 3.4.1 Free Cash Flow to the Firm 3.4.2 Free Cash Flow to Equity 3.4.3 Company SEGI’s Free Cash Flows Case Study SEGI’s Operating Cash Flow SEGI’s Investment Cash Flow SEGI’s Free Cash Flow to the Firm SEGI’s Free Cash Flow to Equity 3.4.4 Free Cash Flow Summary 3.5 Cost of Equity 3.5.1 The Methods Used 3.5.2 The Issues and Ambiguities of the Risk Premiums 3.5.3 Estimated Cost of Equity for a Small Business 3.5.4 Implementation of the Build-Up Method 3.6 Weighted Average Cost of Capital (WACC) 3.7 Dividend Discount Model 3.8 DCF Case Study (Company SEGY) 3.8.1 Free Cash Flows and Assumptions 3.8.2 Indirect DCF Method Step 1 of the Calculation Step 2 of the Calculation, Equity Value Estimate 3.8.3 Direct DCF Method 3.8.4 Estimated Equity Value 3.9 Key Takeaways and Limitations References and Further Reading 4 Market Approach to Valuation 4.1 Precedent Transaction Analysis 4.2 The P/E Multiple Approach 4.2.1 Potential Valuation Case Study 4.2.2 P/E Dynamics The Credit Risk Factor The Estimated Growth in Net Income The Level of Interest Rates 4.2.3 P/E Limitations 4.3 The EV/EBITDA Multiple Approach 4.4 Other Comparative Valuation Approaches 4.4.1 The Price-to-Book Value Multiple 4.4.2 Cash Flow Multiples 4.4.3 Valuation with a Non-Financial Multiple 4.5 Market Multiple Adjustments 4.6 Case Study with the P/E and EV/EBITDA Multiples 4.6.1 Company Y’s Financial Data 4.6.2 Comparison Between the P/E and EV/EBITDA Multiples 4.6.3 Equity Value Calculation with the Two Sector Multiples 4.6.4 Equity Value Calculation with the Leader Multiples 4.6.5 Equity Value Calculation with the Laggard Multiples 4.6.6 Equity Value Overview 4.6.7 The Business Valuation Professional’s Decision 4.6.8 The Drawbacks of Historical Averages 4.7 Key Takeaways and Limitations References and Further Reading 5 Full Valuation Case Study (Company SEGA) 5.1 Generalities on the Applied Valuation Methods 5.2 Presentation of Company SEGA 5.3 Adjusted Net Asset Value 5.3.1 The Adjusted Net Asset Value Method Income Statement Adjustments Balance Sheet Adjustments Adjusted Equity 5.3.2 The CEEM or Goodwill Method The CEEM Using Excess Operating Earnings The CEEM Using Excess Net Earnings 5.3.3 Asset-Based Equity Value Estimates 5.4 Discounted Cash Flow Methods 5.4.1 Valuation According to the Optimistic-Case Scenario 5.4.2 Valuation According to the Pessimistic-Case Scenario 5.4.3 DCF Value Estimates 5.5 Precedent Transaction Analysis and Market Multiple Valuation 5.5.1 Precedent Transaction Analysis 5.6 Adjusted P/E Multiple 5.6.1 Dividend Discount Model 5.6.2 EV/EBITDA Multiple Valuation 5.6.3 Market Value Estimates 5.7 Estimated Equity Value of Company SEGA 5.7.1 Results 5.7.2 The Valuation Professional’s Decision References and Further Reading General Bibliography, Webography, and Further Reading Index