Handbook of Business Valuation

Business valuations are usually segregated into three basic categories: (1) transaction-based-mergers, acquisitions, divestitures, ESOPs, buy/sell agreements, exchange ratios, fairness opinions, LBOs, and initial public offerings, (2) tax-based-gift and estate taxes, estate planning and recapitalization, subchapter S conversions, charitable contributions, and granting of stock options, and (3) litigation-based-divorces, condemnations, bankruptcy, shareholder dissent, and damage determination. Before anything can be appraised, two questions must be answered: Value to whom? For what purpose? Different perspectives of valuation are given from various positions: Valuation from a seller’s perspective. Businesses are usually listed at the price or gut feeling that the sellers want for their business, regardless of the range of values provided by a competent professional broker. Valuation from the lender’s perspective. For the most part, typical lenders are less concerned about the value of a business than they are about how a business will handle its loan obligations. Nonetheless, they are still interested in business valuations, viewing them from a different angle than other parties. Because of the inherent conservatism of most banks, they view projections with skepticism, preferring to examine a company’s financial history. Differences between "middle market" and "small businesses." The primary rationale of the small business is to provide employment for the owner. The essence of the middle market enterprise is leverage of the skills of the owner/manager, capital, and ideas. The purchaser of this type of business combines a high tolerance for risk with an anticipated higher rate of return. Business valuation is concerned with the value of the rights inherent in ownership of a commercial, industrial, or service organization pursuing an economic activity. The book gives a variety of approaches and methods to help recast financial statements and evaluate machinery and equipment.