Do you have the highest and most accurate valuation for your business?

Most experts advise a complete valuation to account for all of the factors which impact the value of your business. These factors include:

An inaccurate view of the value of your business (whether too high or low) will adversely impact the success of your sales effort.

A business valuation is an investigation into the law of probabilities with respect to business value. Through the evaluator's experience, training, and integrity, we are able to project the activities of buyers and sellers in the marketplace into an estimation of value. In reaching a conclusion, comparison of businesses usually involves adjustments due to the individuality and uniqueness of each business. Transactions are often influenced by sentiment, personal bias, individual needs, politics, state of mind, and other conditions not considered by the impartial evaluator.

A business valuation cannot be guaranteed, nor can it be proven. The opinion of value can, however, be substantiated and the final opinion is the result of a thorough professional analysis of a large amount of data. An valuation must not be considered absolute but should be used as a basis of negotiations between concerned parties, whatever their interests.

The valuation process as followed in the preparation of this report is an orderly procedure for arriving at an estimate of value. By following this procedure, the evaluator begins with a preliminary study of the issues and defines the basis from which the opinion of value is to be made. Once the data has been collected, a systematic approach is taken to analyzing the data and selecting appropriate valuation methodologies.

In assignments to estimate fair market value, the ultimate goal of the valuation process is a supported conclusion that reflects the evaluator's study of all influences on the value of the company being appraised. Therefore, the evaluator studies the business from various perspectives. Various questions are raised and answered through research of the industry and the financial capabilities of the subject business. Some of the questions researched may be found in the supporting data section of this report.

The various valuation approaches are interrelated, and each involves gathering and analyzing specific pieces of data relating to the company being analyzed. From the analysis, the evaluator derives separate indications of value, of which one or more may be used in determining the final value.

To complete the valuation process, the evaluator integrates the information drawn from market research, analysis of data and numerous valuation techniques to form a conclusion. This conclusion may be an estimate of value or a range in which the value may fall. An effective integration depends on an evaluator's skill, experience, and judgment.

Every evaluation method and technique must comply with and is limited to the following principles if the final results are to be considered significant.

What a reasonable buyer will pay a reasonable seller.

The term ?reasonable? in this context is used in the economic sense. The buyer and seller are each assumed to be comparing alternative investments and when the economic incentive to purchase is equal to the economic incentive to sell, a deal is made.

For evaluation purposes, a business is defined as an organized method of producing revenues routinely over a period of time.

The value of a business is divided into two (2) components:

1. The asset value represents the value of machinery, equipment, buildings and land, usable stock and other legal rights.
2. The business value or goodwill value of a business represents the premium value a buyer will pay the seller for organization and historically recorded cash flows.

Additionally, when comparing alternative investments, there is no economic incentive to invest capital in a business which has not or is realistically not capable of producing a net income in excess of the operator?s salary plus a reasonable return on investment.

Accuracy depends upon the standard use of terms, methods, and disclosure of information.

This report is only as good as the data it is based upon. This report makes adjustments for minor mistakes in judgment or interpretation of questions; however, accounting or financial data is taken at face value.

The report includes documents and source notes when possible. The inclusion of source materials with any evaluation will have many effects:

• Transfer liability from personal opinion to fact.
• Add credibility to the results.
• Ensure accuracy of data.
• Ensure a source of future reference.

All estimated values are limited by time.

Any sales price is subject to change as the market conditions change. Therefore, the suggested price is valid only for a short time relative to the size and scale of a given business, in a given industry, and in a given market. Documentation of the data used in this report will provide the basis for analyzing how this data will change over time.

Fair Market Value

The single most important market factor to impact the value of a business is the supply and demand of an equally desirable substitute that is available in the marketplace. According to the principle of substitution, the value of a thing (business) tends to be determined by the cost of acquiring an equally desirable substitute. A buyer will pay no more for a business than the cost of purchasing a similar business. This concept is the basis of fair market value and is the overriding methodology in this evaluation report.

There are three approaches to determining the value of any asset:

1. The cost approach, which considers the cost of purchasing or producing the business.
2. The market data approach, which values the business based on current sales in the marketplace for the same or similar business.
3. The income approach, which is a financial analysis consisting of capitalizing an income stream based on the cost of money and a risk rate that reflects current market conditions.

In order to arrive at a supportable value, we have chosen those methods that would best apply to the purchase of the subject business as reflected by the marketplace.

The Internal Revenue service established Revenue Rule 59-60 as the standard for the valuation of closely held companies. The following summarizes the key factors to consider:

1. History and Nature of the Business.
2. Economic Outlook.
3. Book Value.
4. Earning Capacity of the Enterprise.
5. Dividend Paying Capacity of the Enterprise.
6. Goodwill and Intangible Assets.
7. Recent Sales of Stocks.
8. Market Value of Comparable Companies.

Cost Approach

In considering the cost approach, we must remember that the cost of something does not necessarily determine its selling price. This is true in a rapidly changing market, which is highly affected by technological changes or variances in supply and demand. This is especially true if a company is very young and has not yet established enough of a track record to make a confident analysis of the future performance.

Also, in the case of a business, all serious practitioners of business valuation agree that book value is not necessarily an adequate proxy for representing the underlying net asset value of a business for valuation purposes, much less for representing the value of the business itself. However, book value is a figure that is available for almost all businesses. Furthermore, it is a value that different businesses have arrived at by some more or less common set of rules, usually some variation within the scope of generally accepted accounting principles (GAAP). Also, each asset or liability number that is a component of book value as shown in the financial statements represents a specific set of obligations that can be identified in detail by referring to the company?s records, assuming that the bookkeeping is complete and accurate. Therefore, book value usually provides the most convenient starting point for an asset value approach to the valuation of a business interest.

The nature and extent of adjustments that should be made to book value for the business valuation depend on many factors. One, of course, is the purpose of the evaluation. Another, which is frequently a limiting factor, is the availability of reliable data on which to base the adjustments both for the subject company and for other companies which might be compared in the course of the valuation.

Once concept for fixed assets is value in use, the value of the operating assets to the owner/user, or buyer who will use it in a similar manner. Value in use is the value that includes consideration for the unique relationship of the item to a particular business such as the subject. There is a value for an item, which is already in place and is ready to use. The value might be the item?s retail price, plus applicable taxes, freight, and installation charges. The summation of these costs, after proper deductions for depreciation and obsolescence, is the value in use of that item. This value may be different from its fair market value to a buyer who will not use the equipment at its present location. A definition for value in use is as follows:

The value of an economic good to its owner/user is based on the production (privacies in income; utility or amenity form) of the economic good to a specific individual. This is subjective value, however, and may not necessarily represent the market value.

We, therefore, have to subjectively estimate the value in use of the subject?s assets based on past experience with assets of a similar nature.

Income Approach

The income approach is especially meaningful if assets are used to produce income, such as in the valuation of a business. However, it still takes root from the market data approach because it is an analysis of what the current market is paying by determining a comparable return that can be capitalized into a comparable purchase price.

Market Data Approach

In other types of valuations, mainly real estate, the market data approach indisputably will always yield the most accurate results. It is a true representation of the current marketplace because it is what the market is paying for the same or similar asset. However, in the case of a business, using public or private comparable sales price-to-earnings or income-to-sales ratios may be the least reliable for several reasons, among which are:

1. No two businesses are alike.
2. Business sales are not recorded and, therefore, information gathered is usually sketchy.
3. Accounting records are not necessarily standardized between the comparable companies. There is no standard definition of net profit or income, revenue, cost of sales, and many other financial statement items.
4. Some comparable sales include assets that the subject business does not have and these assets are not valued separately, so the evaluator cannot make proper adjustments.

The market data approach can be very useful when analyzing data drawn from the market as to what types of ROI (return on investment) ratios are customary, or data based on Price-to-Earning ratios that buyers are willing to pay in order to purchase a certain type of business.

Stock Price Data from Publicly Traded Companies

It can be argued that the use of stock prices of publicly-owned companies to estimate the market value of privately held companies is a source of comparable data. However, many business evaluators realize that to estimate the market value of a privately held business by using this data is seriously flawed in several respects:

1. Publicly held companies, whose stock is listed on the major exchanges, are usually much larger than the closely-held businesses that are being appraised. This difference in size raises serious questions as to whether the two are, in fact, comparable.
2. Prices of publicly traded stock reflect the sale of very fractional ownership interests. On the other hand, the evaluator?s objective is usually to estimate the market value of a major ownership interest, frequently, one hundred percent ownership of the closely held business.
3. Selecting appropriate publicly traded companies is tantamount to guess work, and, thus, cannot be relied upon.
4. The price to earnings ratio represents the ratio of a current stock to an earnings-per-share figure that can be from a few weeks to several months old.
5. Probably the greatest fallacy of attempting to use publicly traded stock prices to estimate the value of a closely held business lies in the psychology of the investor. The potential buyer for a closely held business is almost always concerned with the anticipated performance of the business itself. Of course, it is sometimes argued that the trend of stock prices of a publicly held company is strongly influenced by the company?s performance. However, it is demonstrable that, whereas this does tend to be true in the long run, there are many influences on stock that tend to be of short-term nature, and that strongly influence stock prices while bearing relatively little long-term relationship to the company?s performance. Therefore, using the prices of publicly traded stocks is not recommended as a means of estimating the value of closely held businesses.

Still another source of market data is, of course, information on actual sales of companies, such as the subject, in the evaluator?s local community. It is unlikely, however, that there will be enough information available on sales similar to the subject to provide a statistically sound basis for estimating the business? market value. However, as mentioned above, when analysis based on research on potential buyers for this kind of investment is made, important insight into what a buyer is willing to pay for a particular business can assist the evaluator in determining an accurate opinion of value. This analysis must include such factors as industry risk, the local and national economy, competition, barriers to entry, and the future potential of Greeting and Name.

In this report we may include information or make comments on similar business sales that might have a bearing on our opinion of value. However, it is very important to remember that it is a difficult task to quantify how similar or dissimilar are two businesses, and, therefore, using price to earnings ratios and price to revenue ratios from comparable sales has a built in uncertainty. It is possible that if no comparable sales information is available, or if it?s too unreliable, the evaluator may elect not to use the market data approach in this valuation.

It is important to note that under guidelines by ?The Uniform Standards of Professional Evaluation Practice? (Standards Rule 9-5), the Internal Revenue Service (Revenue Ruling 59-60), as well as most evaluation societies, the evaluator is required to use all approaches for which reliable data is available and applicable. The use of as many approaches and methods within these approaches is useful to the extent that it will establish a range of values for the entity being appraised.

Revenue Ruling 50-60 (in Section 3, ?Approach to Valuation)? recognizes the fact that appraising is not an exact science: ?[a] sound valuation will be based upon all the relevant facts, but the element of common sense, informed judgment and reasonableness must enter into the process of weighing those facts and determining their aggregate significance.

Sometimes it will be obvious that the analyst should rely on a single approach, such as methods under the cost approach whereby earnings are insignificant to the value of the assets. An example of this would be a new enterprise with little or no longevity or profits, where projections would be meaningless. Another example would be a company that has longevity, but insignificant profits, and would be a candidate for liquidation. In other cases, it may be apparent that several methods would be appropriate for the final value conclusion. When this is the case, the evaluator must look to the real world to determine which method or methods should receive the most weighting.

Service companies can represent a significant problem to the evaluator in that there are few assets that would give a buyer confidence should the business someday fail. In any case, risk is the most important factor to consider in an evaluation. As stated earlier, and acknowledged in Revenue Ruling 59-60, value is based on anticipated expectations of the buyer as to future performance. In other words, what a company did in the past has no significance to its value if that trend is not anticipated in the future.

Although assets play an important role in risk calculations, one must remember that earnings and the anticipation of an increasing income stream are the overriding factor in the purchase of a business. The process of elimination and an analysis of methods both suggest that the income approach methods are clearly the most representative of current market value.