Outline: Chapter 15
Business Valuation
General Concepts that Guide the
Determination of Value
 Basic Information Required for a
Valuation
 Discounted Cash Flow
 Market Comparisons Techniques and
their Drawbacks
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Concepts that Guide the Determination
of Value
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Fair market value
Going-concern value
Highest and best use
Future benefits
Substitutes and alternatives
Discounted cash flow analysis
Objectivity
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Information Required for a Valuation
Income statements and/or tax returns
 Balance sheet
 Rates of return consistent with the risk
level
 Interviews with current owners and staff
 Assessment of future business environment
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Information Checklist for Management Interviews
Table 15.1
List of employees and salaries.
2. List of all owner’s personal expenses
3. Summary of equipment needing repair or replacement
4. Key employees likely to stay with the company
5. List of judgments or potential judgments against the
firm.
6. list of receivables that are unlikely to be collected
7. list of payables that are past due
8. Expectations to keep customers satisfied
9. Common problems
10. Cost accounting capabilities
11. Outlook for the industry
1.
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Estimating Cash Flow
EBIT
+owner’s salary
-reasonable salary
+depreciation
+personal expenses
=EBITDA
-equipment purchased
-inventory investment
=Free Cash Flow
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Expected Long-Run Annualized Returns
Table 15.2
Type of
Purchaser/Investor
Expected Returns
Publicly Traded Companies
12-18%
Privately Held Companies
(with substantial history)
20-35%
Angel Investors
20-50%
Venture Capitalists
35-80%
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Relationship of Price and Net Present Value
Table 15.10
Price > Net Present Value Buyer earns more than
the required rate of
return
Price < Net Present Value Buyer earns less than the
required rate of return
Price = Net Present Value Buyer earns exactly the
required rate of return
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Ratio Formulas for Market Approach
Table 15.11
Variable
Ratio
Net income
Price/Earnings
Earnings per share
Price/Earnings
Pretax earnings
Price/Pretax earnings per share
Cash flow
Price/Cash flow
EBITDA
Price/EBITDA
Dividends
Price/Dividends
Gross revenue
Price/Sales
Total assets
Price/Assets
Book value per share
Price/Book values per share
Number of total customers
Price/Number of customers
Industry specific measurements
Price/Unit
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Outline: Chapter 16
Exit Planning
Self-assessment revisited
 The ethical side of the entrepreneur’s
transition
 A model of exit planning
 Exit options
 The process of selling a business
 Post exit issues

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Exit Planning
The process of preparing for the
transition of both the entrepreneur and
the business
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The Exit Planning Process
Figure 16.1
Self-assessment: Goals related to financial, professional, family, etc.
Establish exit time frame
Manage financial statements
Conduct external audit
Develop business plan for sale of business
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Exit Through Ownership Transfer
Type of Exit
Asset Sale
Advantages
Cash sale
Disadvantages
Immediate tax on
full sale
Lower face value
sale price
Clean break
Earn-out possible
Stock Sale
Higher face value
of sale price
Potential volatility
of stock from sale
Tax deferment of
sale price
Restrictions on sale
of stock
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Exit Through Partial or Limited Transfer
Type of Exit
Merger
IPO
Advantages
Potential synergies
Disadvantages
Cultures may clash
Tax deferment of
sale price
Limited
opportunity for
immediate cash
Taking some cash
out possible
Can bring in
professional
management
Limits on sale of
stock
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Exit Through Partial or Limited Transfer
(Continued)
Type of Exit
Advantages
Strategic Alliance Reduces risk to
existing value
ESOP
Family Business
Transfer
Disadvantages
May be long
time, if at all, to
actual exit
Can maintain
May be long
business culture time, if at all, to
actual exit
Can maintain
Challenges of
business culture generational
succession
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Exit Through Bankruptcy
Type of Exit
Bankruptcy
Advantages
Orderly end to
business
Disadvantages
Ethical
challenges
Results in no
realization of
wealth from
business
Can hurt
entrepreneur’s
ability to fund
future deals
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Exit Through Liquidation
Type of Exit
Liquidation
Advantages
Disadvantages
May result in
No value for
more value,
going concern
especially for
service business
Can be viewed
as “failure”
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Sale Process of a Business
Figure 16.2
Initial Inquiry
10 % of deals proceed to next stage
Letter of Intent
Deal Price and Basic Structure Agreed Upon
50 % of deals proceed to next stage
Due Diligence
50 % of deals proceed to next stage
Purchase Agreement and Closing
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