i am growing my business, but is it increasing in value
TRANSCRIPT
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I Am Growing My Business, But Is It Increasing In Value
Presented by:
McKonly & Asbury, LLP
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Agenda• The Principles of Business Valuation –
How Is Value of a Business Determined• What Drive Business Value• Other Business Matters that Drive Business
Value• Summary
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About David Blain, CPA, CVA• Partner in the Audit and Assurance Practice
Unit• Practice leader of the Entrepreneurial
Services and Manufacturing Groups• Certified as a LEAN Professional through the
MANTEC LEAN Certification Program• Board and Executive Board Member of
MANTEC
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What is Business Valuation?
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What is Business Valuation?
• Establishing a Value of an Interest in a Business or Professional Practice– Quantitative Analysis– Qualitative Analysis
• Established at a Specific Point In Time
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What is Business Valuation?
• Establishing the Value of an Asset– Tangible Asset Valuation
• Building and Land• Equipment
– Intangible Asset Valuation• Goodwill• Trademark• Customer Lists
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Why Business Valuationsare Performed
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Some Reasons for a Business Valuation• Determine Price of Shares for Estate & Gift
Tax Planning• Determine Market Price of Business for
Acquisition/Divestiture • Succession Planning/Business Initiatives• Other
– Determination of Damages/Litigation Support– Employee Benefit Programs/ESOPS
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What is Value?
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What is Value?Definition:“A fair return or equivalent in goods, services or money from something exchanged; the monetary worth of something; marketable price; relative worth, utility, or importance; something intrinsically valuable or desirable.”
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What is Value?
Fair Market Value Definition:The price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, and both parties have reasonable knowledge of the relevant facts. (Revenue Ruling 59-60)
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Common Types of Value
• Fair Market Value• Investment Value• Intrinsic Value • Going Concern Value• Book Value • Liquidation Value
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Business Valuation Approaches
…How Certified Valuation Analysts Value a Business
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Asset Approach
• Adjust assets and liabilities to Fair Market Value.
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Market Approach
• Comparable transaction data.
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Income Methods
• Capitalization of benefits method -- if stable.– Cash flow/EBITDA.– Benefits = cash flow.
• Discounted future benefits -- when earnings are not stable.
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Profit Enhancement Ideas – Driving Business Value
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The Marketplace Values…
• Cash flow• Cash flow is driven by:
• Profit• Customer base• Intellectual Property
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Cash Flow Enhancements
• Driving Revenue.• Reducing Expenses
(LEAN/Operational cost reviews).
• Utilizing outsourced services.
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Cash Flow
• Usually defined as Free Available Cash after all expenses have been paid.
• Expenses would include all operating expenses including taxes, interest on debt and capital requirements.
• Free cash flow does not include depreciation and amortization – non-cash items.
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Free Cash Flow Calculation
Scenario 1
Revenue $1,000Operating Expenses ($500)Taxes ($100)Interest on Debt ($50)Capital Assets ($100)
Free Cash Flow $250
Scenario 2
Revenue $2,000Operating Expenses ($1,500)Taxes ($100)Interest on Debt ($150)Capital Assets ($100)
Free Cash Flow $150
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Cash Flow Analysis
• From the valuators perspective, scenario 1 provides more value – More free available cash from that business model
• Value could be impacted by discount rates but overall the free cash flow drives value
CASH IS STILL KING
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Which Drives More Value
Scenario 1Revenue $5,000Operating Expenses ($1,500)EBITDA $3,500Interest ($1,000)Depreciation/Amort. ($1,500)Taxes ($500)Net Income $500
Annual Capital Requirements are $250
Scenario 2Revenue $6,000Operating Expenses ($2,000)EBITDA $4,000Interest ($1,000)Depreciation/Amort. ($2,000)Taxes ($500)Net Income $500
Annual Capital Requirements are $1,000
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Which Drives More Value, cont.
• While both scenarios drive similar net income, scenario 1 drives more free cash flow ($1,750 versus $1,500).
• Revenue generation, while important, does not always drive higher value.
• Business needs and capital intensity has a direct impact on value proposition.
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Taking Charge of Your Business
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Building a Foundation
“The loftier the building, the deeper the foundation must be laid.”
- Thomas Kempis
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Adding Value to the Business
• Maximize technology.• Selective Outsourcing.• Building Partnerships.
– Organization level.– Teams.– Individual.
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The Infrastructure of Your Business…
Planning, People, Process
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Planning
• Begin with the end in mind.• Focus on those items that directly drive
value.– Strategic planning.– Marketing/sales.– Capital Expenditures -- IT/Infrastructure.
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People• Adding talent.• First who, then what (Good to Great).• Selecting for talent and cultural fit
(Gallup).• Comparative Advantage.
– What employee can ONLY do, then they do. Everything else is outsourced or delegated.
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Process
• Is every job/deliverable custom?– No efficiencies/economy of scale.
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Process
• Hedgehog Concept
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Process
• “Never turn away revenue” -- As strange as it sounds, not all revenue was created equally.
• Turn away jobs that are not in your hedgehog/sweet spot.
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In Summary…
• Scalability.• Comparative advantage.• Thinking like an investor.• Have a plan – exit strategy.
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Questions?
Contact David Blain, CPA, CVAPartner at McKonly & Asbury