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We will use the same hypothetical case for ease of reference in this chapter However, before delving into the practice work, I need to talk more about an ever-present environment surrounding the valuation task that must not be ignored It is so easy for even some experts to slip into believing that business valuation is a precise science It s not! It never can be, because people will never let it be that You can count on the motivations for gain and need to rise frequently in individuals to complicate even what might otherwise look to be the simplest of business valuation assignments Value in the small, closely held company is value as the participants to a deal would have value done Proof, however, is putting value where the mouth is, because saying it is so is not so until a deal has been done As mentioned in the last chapter, value is both elusive and theoretical until price has been established by actual transactions The goal in valuation, then, is to estimate all the various conditions that market economies might bring to bear on a price that would be most likely to cause transactions between buyers and sellers to occur Regardless of the purpose of the task, this causation issue must be the focused target in valuing the small company The parameters of intended use can then adjust the ndings to t the needs of recipients Intrafamily transfers might suggest downward value adjustments, and estate or other purposes may offer speci c re nements for their particular use Losing sight of market-based elements too early in the process turns the task into shooting arrows at moving targets that the archer may not be able to hit Thus for reliability, the value processor must nderstand commercial lending parameters as well as prevailing interest rates, understand the supply of available sellers in relation to the demand exhibited by available buyers, understand at least two-cents worth of human psychology, understand general investment principles, understand basic accounting and.



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The CONV function is now aliased to convert. Boolean true values are replaced with 1. Boolean false values are replaced with 0.

much more risky than the purchase of a business with multiple practitioners who remain after the purchase These people or owner-restrictive elements can be present in all types of businesses and, with safety in mind, cannot be overlooked A business continuation risk tends to decrease with increasing size of staff and, when the present owner is more separated from practice work, by the demands of administrative duty Service businesses in general, unless cash ow is quite substantial, tend rarely to command in-line prices equivalent to their hard-asset but equally cash-productive counterparts While cash may be king in the world of users, tangible hard assets call the shots in terms of leveraged or nanced deals Since service businesses tend to be skinny in these touchable xed assets, either the war chests of King Cash get depleted or prices are lowered On the far side of the spectrum, we might nd asset-intense businesses, such as motels, manufacturers, and other operations where signi cant investments in physical plants, machinery, and equipment are present Businesses such as these may frequently sell to customers who tend to be less attached to the small-company owners Bear in mind also that hard assets will comprise most of the nancing collateral for loans and that market value is substantially in uenced by prevailing economies An existing bank climate will affect market value Additional cash and/or attractive seller nancing strategies will generally be required to make up any differences when purchase prices above market values of hard assets are contemplated Banks, though they won t nance without it, just do not place much credence in nancing what they can t see and touch Thus, a typical dilemma of service businesses is to obtain top prices irrespective of strong cash ows But this dilemma can place pricing restrictions on asset-intense businesses as well When cash ows in businesses exceed that necessary to retire debt and pay appropriate salaries and pro ts to owners, and when pricing extends into excesses, the remainders of pricing must come from buyer s cash reserves, through seller nancing, or both From this discussion it could be alluded that a higher hard-asset value might sometimes translate into a lower intangible value In the reverse, a low asset value might then bring a higher intangible value into play Quite often this turns out to be the case However, the elements of cash ow, frequently reasons for purchase, are possibly ignored by these assumptions when taken alone Subsequently, one must clearly decide what part of value is tangible (hard assets) and what part of value is intangible goodwill, as de ned by the IRS) While touchable assets connote rather.

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