When selling a business, formulas will provide an accurate value for a business.

How is a business valued?

• The initial step to selling a business involves a thorough and accurate business assessment.
• Common methods for a business valuation include public market comparable analysis, identifying precedent M&A transactions, discounted cash flow analysis, book or asset based valuation approaches and applying multiples to revenue, EBITDA or net income.
• Many formulas and "rules of thumb" have been developed to arrive at a "ballpark" estimation of value during the business valuation process, but it takes seasoned expertise to look beyond mere formulas and determine a real measure of value.

Relying exclusively on business valuation formulas is not appropriate when preparing for selling a business

• Applying historical financial data to assess value will often result in an inaccurate valuation. It is common for private businesses to report minimal profits on tax returns. While this is smart for income tax purposes, using such figures for business valuation purposes will underestimate the value of the business. Accurately "recasting" financial statements is therefore critical.
• Developing defensible financial projections is also paramount to maximizing value. After all, a prospective buyer is paying for the future cash flows of a business, not past performance.

Comments from the US government about "formulas"

• The US government recognizes the inherent shortcomings of valuation formulas as evidenced by the following excerpts:
• IRS Revenue Ruling 59-60: "No formula can be devised that will be generally applicable to the multitude of different valuation issues…"
• IRS Revenue Ruling 80-213: "Valuation of securities is, in essence, a prophecy as to the future and must be based on facts available and the prospective economic conditions as of the valuation date."
• California Court of Appeals in 142 Cal. App. 3d874 (1983): "We recognize the determination of the value of infrequently sold, unlisted, closely held stock is a difficult legal problem…the cases illustrate there is no one applicable formula that may be properly applied to the myriad factual situations calling for a valuation of closely held stock."

Business valuation is more an art than a science

• Business valuation is not a "standard" process. Value is driven by a wide range of variables, both external and internal, including economic conditions, industry dynamics, stock market conditions, company specific issues, buyer motivations, competition and the strategic assets of a business.
• Accurately assessing a business value requires experienced professionals with a strong command and understanding of the many variables that can determine value.

Generational Equity can assist you in realizing maximum value for your business

• The team at Generational Equity is comprised of motivated members with vast experience in selling businesses. Our experience, results and roster of successfully completed transactions speak for themselves. We offer objective, high level financial and strategic advice to middle market businesses.