Business Valuations in Boise

What Determines Value?

While there are many areas that a business appraiser will evaluate, cash flow and risk are the two critical factors.

Fundamentally, a buyer purchases a business for income. Cash flow can be expressed in many ways, typically either as Earning Before Interest, Taxes, Depreciation, and Amortization (EBITDA) or Seller’s Discretionary Earnings (SDE). SDE or EBITDA is the most common basis for establishing a selling price in small business transactions. The bottom line is that the more cash flow there is, the more a buyer will likely pay to get it.

All cash flow comes with a degree of risk. Risk may be present in customer concentration, reliance on vendor relationships, macroeconomic trends, competitive forces, key employees, legal exposures, and more. A formal business valuation will include an analysis of the company’s risk and quantify that risk into a percentage known as a Discount Rate or Capitalization Rate.

Standards of Value

Value is not a singular, universal term when it comes to determining the value of a business. There are at least four common standards of ‘value’ you will hear referenced:

• Fair Value (Special Value): The price at which a property will change hands between a willing buyer and a willing seller considering the specific advantages or disadvantages each party will realize (aka synergistic buyer).
• Investment Value (Going Concern Value): The price at which a property will change hands between a willing buyer and a willing seller considering the investment objectives of the identified buyer (aka financial buyer).
• Liquidation Value: The price at which a property will change hands between a willing buyer and a compelled seller when the property cannot be exposed to the open market for a sufficient period of time (aka orderly or forced sale).
• Fair Market Value: The price at which a property will change hands between a willing buyer and a willing seller when both parties have reasonable knowledge of the facts and neither is compelled to act.

Due to its objectivity and excluding bankruptcy scenarios, Fair Market Value (FMV) is commonly viewed as the most relevant standard of value when evaluating a business for acquisition purposes. However, other standards of value may be included in the overall analysis.

What About Goodwill?

Goodwill is not a random figure – it is calculated by subtracting tangible value from the total value. The residual is considered goodwill or intangible value. Business sellers often overestimate the value of goodwill, assuming that things such as technology and an established brand add “goodwill” value that should be featured into the asking price – it doesn’t unless those items improve cash flow.