Section 10: Business Valuation Flashcards
A business is in the process of being acquired. What determination of value would the owner be interested in?
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.
A subchapter S corporation is taxed as WHAT, whereas a C corporation is taxed at both the corporate and shareholder levels.
A partnership
How many partners must a limited partnership have?
At least one general partner.
Which of the following is true regarding an appraiser’s final estimate of value?
It can be subjective, based on the appraiser’s experience and judgment.
What type of value would be estimated for a company that is going out of business?
Liquidation value
Company is being liquidated. What should the appraiser consider in his appraisal?
Whether the company needs to sell its assets quickly.
Which entity meets the definition of a business structure that has no general partners and whose owners have limited personal liability?
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
Going-concern value
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.
Liquidation value
estimate of the value used to describe businesses that are going out of business
Sole proprietorship
simplest business form. One person owns the business, and one person is personally responsible for all its debts.
partnership
Can be general or limited
Partners don’t have to have equal share
General partnership
Conveys personal liability for debts
Partners are jointly and separately liable for these debts
Limited partnership
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.
Corporations
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.
Limited Liability Companies (LLC)
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.
Limited Liability Partnerships (LLP)
- 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.
Current Ratio
Current assets / Current liabilities
Quick Ratio
(Current assets - inventory) / current liabilities
Inventory Turnover Ratio
Cost of goods / ending inventory
Debt-to-Worth Ratio
liabilities / tangible net worth
Net-Profit-to-Owner Capital Ratio
Shows the one year return to an investor on the capital.
How many years of financial statements does a business appraiser generally collect?
Five
What is a market balance sheet?
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.
Sales Comparison Approach to valuation
- 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.
Cost Depreciation Approach to valuation
- 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.
Income Capitalization Approach to valuation
- Prepare a pro forma income statement
- Select a capitalization rate that corresponds with the rates of similar businesses
- Divide the subject’s net operating income by the cap rate found in step 2
Liquidation Approach to valuation
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
In order to use a capitalization rate to help estimate the value of a business, what two approaches to
value must be used together?
Income capitalization and sales comparison
Which of the following would the appraiser consider to be goodwill?
The reputation of the business and its owner.
This approach to valuation is more conservative than the other approaches and would be used for a
business that is unlikely to continue operating.
Liquidation
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?
Market residual approach
Capitalization Rate formula
Net Income / Sales Price
What are some separable intangible assets?
licenses, copyrights, franchieses, trademarks
