Do Your Own Business Valuation Part 4

Information about Do Your Own Business Valuation Part 4

Published on December 9, 2009

Author: decoffman



Do Your Own Business Valuation - Part 4: Do Your Own Business Valuation Series Designed to Help Small Business Owners Do Their Own Business Valuation Part 4 Instructor: Instructor David E. Coffman CPA/ABV/CFF, CVA Accredited & Certified in Business Valuation – ABV & CVA Has Valued Hundreds of Small Businesses President & CEO of: Business Valuations & Strategies PC, Harrisburg, PA Business Advisors Group PC, Seaside Park , NJ Email: [email protected] Part 4 - Quantifying Business Risks: Part 4Quantifying Business Risks Basic Concept of Business Value: Basic Concept of Business Value Business Value = Returns ÷ Risks Returns quantified using Sales Earnings Risks quantified using Multiples Rates Specific Risk Factors: Specific Risk Factors Factors Cover all aspects of the business Rate risk using scale of 1 to 3 (high to low) Average score is applied as a multiple to cash flow Payback Period: Payback Period How quickly you want to recover initial investment Riskier investment requires shorter payback Small businesses often expected to have payback period of 1 to 3 years Payback period applied as a multiple to cash flow Expected Return on Investment: Expected Return on Investment Greater than stock market (15%) but less than venture capital (40%) Narrower range – 25% to 35% Use specific risk factor method to determine rate – 1 = 35% to 3 = 25% Divide average cash flow by rate Industry Rules of Thumb: Industry Rules of Thumb Some industries have formulas Expressed as a range of multiples Picking the best multiple within the range is critical Use specific risk factor method to determine multiple – 1 = lowest to 3 = highest Source – Business Reference Guide from Business Brokerage Press Conclusion: Conclusion Quantifying risks Key component of business value Often arbitrary Given several easy & logical methods NEXT – Part 5: Adjusting Net Income For More Information About: Doing Your Own Business Valuation – Getting a Low-Cost Business Valuation –

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