Section 10: Business Valuation

Question 1

A business is in the process of being acquired. What determination of value would the owner be interested in?

Answer 1

Going-concern value

Going-concern value is an estimated value of a business that assumes that the business is currently in
operation (and is expected to continue to be in operation over time) at the time of the appraisal.

Question 2

A subchapter S corporation is taxed as WHAT, whereas a C corporation is taxed at both the corporate and shareholder levels.

Answer 2

A partnership

Question 3

How many partners must a limited partnership have?

Answer 3

At least one general partner.

Question 4

Which of the following is true regarding an appraiser’s final estimate of value?

Answer 4

It can be subjective, based on the appraiser’s experience and judgment.

Question 5

What type of value would be estimated for a company that is going out of business?

Answer 5

Liquidation value

Question 6

Company is being liquidated. What should the appraiser consider in his appraisal?

Answer 6

Whether the company needs to sell its assets quickly.

Question 7

Which entity meets the definition of a business structure that has no general partners and whose owners have limited personal liability?

Answer 7

LLP

Both limited and general partnerships must have at least one general partner. LLCs have no general partners. The owners are referred to as members

Question 8

Going-concern value

Answer 8

estimated value of a business that assumes that the business is currently in operation (and is
expected to continue to be in operation over time) at the time of the appraisal.

Question 9

Liquidation value

Answer 9

estimate of the value used to describe businesses that are going out of business

Question 10

Sole proprietorship

Answer 10

simplest business form. One person owns the business, and one person is personally responsible for all its debts.

Question 11

partnership

Answer 11

Can be general or limited
Partners don’t have to have equal share

Question 12

General partnership

Answer 12

Conveys personal liability for debts
Partners are jointly and separately liable for these debts

Question 13

Limited partnership

Answer 13

One or more general partners assume liability
Usually set up because a general partner discovers the business opportunity and brings limited partners on for their funds.

Question 14

Corporations

Answer 14

conjured by law and are an intangible, taxable, recognized legal entity

Articles of incorporation creates the corporation and serves as the basic governing documents

A corporation may be a subchapter S corporation (permitted to function as a corporation but taxed as a partnership), or C corporation
a , which must pay corporate income tax to the IRS.

Question 15

Limited Liability Companies (LLC)

Answer 15

combines the pass through taxation of a partnership or sole proprietorship with the limited liability of a corporation

Owners are called “members”

LLC owners cannot be held personally liable if their co-owners or employees are found to have committed wrongful acts
during the course of conducting business.

If the LLC is found liable for the actions of its owners or employees, the LLC’s
money or property can be taken to pay off the debt, but the LLC owners cannot be held personally liable.

Question 16

Limited Liability Partnerships (LLP)

Answer 16

• business structures that have no general partners.
• Partners share the company
  profits and report them as income on their individual tax returns.
• All partners have an equal say in how the business is managed, and each has limited personal liability for business debts.
• An LLP protects each partner from debts against the partnership arising from professional malpractice lawsuits against another partner. LLPs tend to be formed by
  professionals, such as accountants, lawyers, and architects.

Question 17

Current Ratio

Answer 17

Current assets / Current liabilities

Question 18

Quick Ratio

Answer 18

(Current assets - inventory) / current liabilities

Question 19

Inventory Turnover Ratio

Answer 19

Cost of goods / ending inventory

Question 20

Debt-to-Worth Ratio

Answer 20

liabilities / tangible net worth

Question 21

Net-Profit-to-Owner Capital Ratio

Answer 21

Shows the one year return to an investor on the capital.

Question 22

How many years of financial statements does a business appraiser generally collect?

Answer 22

Five

Question 23

What is a market balance sheet?

Answer 23

The market balance sheet shows assets at their market value, rather than their original cost. Remember that some assets, like equipment or real property, can be worth much more at market value than they originally cost the company.

Question 24

Sales Comparison Approach to valuation

Answer 24

• bases the value of a subject business on the sales prices of similar businesses in the industry.
• the appraiser must find businesses that are comparable to the subject business, based on annual sales, annual net income, and other factors.
• Ideally, the appraiser will have also appraised the comparable businesses, since this provides the appraiser with much more detailed data.

Question 25

Cost Depreciation Approach to valuation

Answer 25

• determines the costs of reproducing a business’s assets to estimate the value of a business.
• generally considered the least effective way to conduct a business valuation. This is because businesses are typically highly complex with lots of moving pieces (unlike real estate), as we’ve mentioned previously.
• A business’s market value is
  dependent on much more than just the cost to reproduce its assets. Sales, income, liabilities, and other factors must be considered
  in order to come up with an accurate estimate.

Question 26

Income Capitalization Approach to valuation

Answer 26

1. Prepare a pro forma income statement
2. Select a capitalization rate that corresponds with the rates of similar businesses
3. Divide the subject’s net operating income by the cap rate found in step 2

Question 27

Liquidation Approach to valuation

Answer 27

ses the anticipated proceeds of a sale of the company’s assets (minus the business’s liabilities). This
approach is more conservative than the others, and would be used for a business that is unlikely to continue operating

Question 28

In order to use a capitalization rate to help estimate the value of a business, what two approaches to
value must be used together?

Answer 28

Income capitalization and sales comparison

Question 29

Which of the following would the appraiser consider to be goodwill?

Answer 29

The reputation of the business and its owner.

Question 30

This approach to valuation is more conservative than the other approaches and would be used for a
business that is unlikely to continue operating.

Answer 30

Liquidation

Question 31

A business appraiser determines the net income generated by a company’s intangible assets and
divides this amount by a pre-determined capitalization rate. What approach is the appraiser taking
when estimating the value of the business’s intangible assets?

Answer 31

Market residual approach

Question 32

Capitalization Rate formula

Answer 32

Net Income / Sales Price

Question 33

What are some separable intangible assets?

Answer 33

licenses, copyrights, franchieses, trademarks