Value Blog

Valuable Answers to Your Business Valuation Questions

06 Mar

Blue and black or white and gold? What does the color of a dress have to do with value?

Posted in Uncategorized on 06.03.15

I just read a post from Mary Bennett on the Blue and Black versus White and Gold debate (  It is amazing how many people became involved with the debate over the color of a dress.  For a few days, it seemed like most people had something to say about the dress.  A week later, it is old news.  For those who missed the debate, see

Back to the dress and how it relates to business valuation.  Mary made a very relevant point that struck home to the work that I do –  valuing businesses. She posted,

 “The phenomenon of the black and blue/white and gold dress is a simple reminder that we in fact do not experience the world in the same way.”  

I am not sure I could come up with a better way to explain business valuation.  The lens with which people view value can cause them to see it differently.

While we (business appraisers) used various applicable methodologies to arrive at a business value, the bottom line is that each person who considers the value of a company will perceive a different value as influenced by his or her experiences, risk tolerance, access to information about the business, intended purpose of the valuation, and specific investment objectives.   Other factors that influence perceived value include motivation, opportunities for synergies, and even lifestyle choices. Each individual’s lens most definitively colors how he or she sees the value of a business.

So the bottom line:  Is the dress black/blue or white/gold?  The simple answer is: Yes.

In the world of valuation, businesses can simultaneously have different values as well.

If you have questions about this or other valuation matters, please contact me.

©2015 Florida Business Valuation Group



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23 Sep

How does risk affect value?

Posted in Uncategorized on 23.09.13

Risk is defined as, “the possibility of loss or injury” according to Merriam Webster Dictionary.

In the context of business valuation, that usually means the possibility of reduced cash flow, which corresponds to a loss in value.  The higher the probability that cash flow could be affected, the greater the risk to the business.

The easiest way to remember the relationship between risk and value is:

As risk increases value decreases

Risk can generally be categorized as coming from things internal to the business or external to the business.  Starting with external risks, the biggest external risk for most companies is competition.  However, external risk can come from many other areas including:

  • Regulatory changes;
  • Technological advances;
  • Catastrophic events such as a bombing in Boston or Hurricane Sandy in the Northeast; and
  • Economic changes

While the occurrence of external risk factors may be impossible for a business to control, many businesses can take steps to minimize the impact of external factors.  A company that anticipates a regulatory change can often modify operations to work around the change.  Sometimes, companies can even find ways to benefit from change by offering improved products and services.  For example, hospitals have been anticipating the mandatory use of electronic medical records (EMR) for years.  Those who have embraced and implemented EMR may be in a superior position to compete with those who got a late start in implementing EMR.

Another way companies can often protect themselves, is by using insurance policies to cover the economic impact of catastrophic events.  Though insurance may not provide 100% coverage for a loss, it may provide sufficient coverage to minimize the impact to the value of a company.  Insufficient coverage may be a risk factor that a company has not considered.

There are also internal risks to a company, which arise from the reliance on internal resources.  Internal risks arise when there is dependence upon key personal without contingency or succession plans.  They can also arise when a company has a poor accounting system and limited internal controls.  Any operational weakness gives rise to an internal risk.

Internal risks may be easier, in theory, to control. However, in practice, it is often harder for owners and managers of a company to recognize and mediate internal risks.  For example, an owner may not see the value, in terms of cash flow, to implement a new accounting system to have better reporting.  The short-sighted view is that these investments in a new system will not increase revenue or cash flow.  While this may, on first blush be true, good financial reporting increases a manager’s ability to monitor revenue trends as well as manage the expenses of a business.  When this can be done in real time, rather than strictly on a quarterly or annual basis, management has the ability to change operations to benefit for trends or save money when spending is not necessary.  Internal control systems, such as POS (point of sale) systems, may not appear to generate revenue until an owner realizes that employees have been skimming cash from the registers for years.

So back to value:  the lower the risk the higher the value.

A company can increase its value by reducing its exposure to internal or external risks associated with operations.  Future posts on the blog will focus on ways businesses can minimize risk, thus increasing value.


If you have questions about this or other valuation matters, please contact me.

©2013 Florida Business Valuation Group



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16 May

Current thoughts on valuation

Posted in General valuation topics on 16.05.13

It has been a long time since the last post.  You could say that doing valuation work has gotten in the way of writing about valuation work.  I have been doing valuations for over twenty years now.   Things have changed a lot since the early days of valuation.

I should clarify, when I talk about valuation, I am referring to the valuation of privately held businesses.  (Public companies are valued in the marketplace all the time.)  Privately held businesses are a different story.  Their prices have been negotiated for transactions.   Formal valuations of private companies mostly arose out of the need to establish value for estate taxes.  The modern estate tax in the U.S.  dates back to the Revenue Act of 1916.  It took until 1959 for the Treasury to issue Revenue Ruling 59-60, which actually explains the foundation for the valuation of privately held companies.  Revenue Ruling 59-60 remains one of the most concise and thorough resources for business valuation.

When I first started doing valuation work in the early 1990s, the internet did not exist as we know it today.  Many of the resources that were used in business valuation came from books and periodicals at the library.  We actually had to drive there and copy the relevant information.

So fast forward to 2013, we have more information available at our fingertips.  Sometimes I think it is too much information.  However, information without the business valuation experience to interpret it and apply it is useless.

The field of business valuation has grown.  Both the body of knowledge and the number of practitioners.  So what is the point of these thoughts?  It is just as important to have an understanding of how to do a valuation as it is to have the information to do a valuation.  Having the data from the transactions does no good if you don’t know how to properly analyze them and determine if the resulting multiple is appropriate.

It is easy to pick a multiple, the hard part is knowing if you picked the right one.

If you have questions about this or other valuation matters, please contact me.

©2013 Florida Business Valuation Group


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01 Jul

What are you really buying in a stock sale?

Posted in Uncategorized on 01.07.11

Most informed  sellers want to sell stock and buyers want to buy assets.  The reasons are relatively simple.

From the sellers prospective, given our current tax structure, sales of stock held for more than a year are generally taxed at the preferred capital gains tax rate.  So sellers want to be able to keep more of the sales proceeds in their pockets.

The buyers side can be a little bit more complex.  Typically a buyer is also motivated by tax considerations.  If a buyer purchases the assets of a company, he or she can allocate the purchase price to the various assets and possibly depreciate them.  But there is more to the buyer’s side.  When a buyer purchases stock, he or she is purchasing all the known and unknown liabilities of that corporation.

If you have questions about this or other valuation matters, please contact me.

©2011 Florida Business Valuation Group


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15 Mar

Does a name matter?

Posted in Goodwill on 15.03.11

Last post I talked about Personal Goodwill.  A name can create Goodwill for a business.  Whether that the goodwill is personal or enterprise, depends upon the circumstances of each business.

When people start their own businesses, many decide to incorporate their name into the business for all sorts of reasons.  It can make it easier to go sell and generate new business when you are selling yourself and the business as one.  For some people there is a little bit of ego involved.  For others it is a way to capitalize on their person reputations.

While these are all valid reasons to use your name in the business name, you should consider using a name the will belong to the business to build the most value.

Branding a business can be difficult because it requires that you work to market the business separate from the owner.  There are times when an owner or manager’s presence is so strong that it becomes difficult to separate the brand name from the key person.  Just look at Apple Computers and Steve Jobs.  When he announced taking a indefinite leave of absence in January, Apple’s stock went down in value.  However, in order to keep the value in the business, Apple will have to prove that the company has the ability to keep generating profits without Steve Jobs.

Likewise, business owners who understand that making themselves dispensable to the business is the best way to build value.  A business that has profits has value to the owner and potential value in the hands of others.  It is the ability to transfer the assets, including goodwill, that generates value in the hands of others.

So while it may be tempting to name your business Smith Manufacturing or Jones Consulting, consider how the name will impact the businesses ability to survive you and be passed on to others.

If you have questions about this or other valuation matters, please contact me.

©2011 Florida Business Valuation Group


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13 Mar

The owner’s role in maximizing selling price

Posted in General valuation topics on 13.03.11

The questions was posed to me recently whether a business would sell for more if the owner sold it before he moved away. The owner plays an active role in the business.

The answer, which seemed obvious to me, may not be so obvious: Yes, the owner should sell it while he is still active and available to ensure an orderly and smooth transition to the buyer.

An orderly transition is usually worth something to a buyer. A buyer will be taking over the business with the expectation of being able to continue operating (and generating income) from the business. To the extent that the seller can transfer his/her knowledge to the buyer, the more likely it is that the business operations will transfer smoothly.

If the business is sold without the owner (or a competent manager) in place, the new owner will have to figure things out. Information about key vendor relationships may not be documented. Nuances about customer preferences may not be written down. Even information about employee policies may not be documented adequately.  If the business “operations” are not transferred, the buyer is merely buying the assets of the business.

How a business runs is what enables it to produced cash flow – and cash flow translates to value (and selling price).  Usually, the better the quality of operational information that transfers, the smoother the transition.  Bottom line: successions plans, which include an orderly transition in a sale, add value to a business.  If you know you will be retiring, relocating or otherwise leaving the business, consider making sure that you allow time to sell/transfer the business so that you can be to ensure a transition to maximize the selling price.

If you have questions about this or other valuation matters, please contact me.

©2011 Florida Business Valuation Group


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01 Mar

Personal Goodwill – Does the value belong to the business?

Posted in Goodwill on 01.03.11

When I write posts, I try to answer questions that are asked of me about valuation.  Sometimes the questions are direct and sometimes I answer the questions that should have been asked.  This is one of the questions that should have been asked.

What is Personal Goodwill?  It is the intangible value associated with the reputation of a person, rather than of the business (usually referred to as Enterprise Goodwill).  Personal Goodwill is most often an issue in divorce cases, but it can be an issue in all valuations, taking the form of a Key Person DiscountPersonal Goodwill can be attributed to a shareholder or an employee.

Personal Goodwill is easily observed in professional practices.  This reputation may result from the person’s manner, his or her technical skills or some other personal attribute.  The personal reputation of a doctor or lawyer is often obvious.

It may be harder to see in other businesses.  For example, in a manufacturing company, the key sales person is able to sell twice as much as any other sales person because she has developed a reputation in the industry for knowing what her customers need and making sure that they order based on those needs.  While the brand reputation of the product she sells, the timely delivery of the product, and the service department reliability are part of Enterprise Goodwill, her personal reputation and resulting profit generated from the additional sales she is able to make above and beyond other sales people in the organization may be attributable to Personal Goodwill. This is the case if the value she brings to the business resulting from the additional sales is greater than the additional commissions she receives.

So how do you distinguish between Personal Goodwill and Enterprise Goodwill?  The easy answer is to project what would happen to the business if the key person left?  Would the company be able to continue generating the same level of revenue and profits?  Could a replacement be hired?

So why does this matter? In valuing a business, the value is just that: the value of the business.  If the business has not entered into contracts to retain personal goodwill , it does not belong to it and is usually not included in value.  (Divorce law varies by state and is beyond the scope of this post.)

However, in valuations that are not for divorce, Personal Goodwill takes the form of a Key Person Discount, which reduces the value of the company for the economic impact of a key person leaving.  As a business owner, there are ways to minimize the impact of Personal Goodwill on the value of a business through various types of contracts with key employees.

Employment contracts can tie an employee to a company for a period of time, maximizing the company’s ability to profit from the relationship.  An employment agreement can also limit an employee’s ability to compete with the company once he or she leaves.  An employment law attorney can assist you in drafting an agreement to safeguard your company to the fullest extent allowable by the law, minimizing the impact of a key employee on the value of the company.

As a business owner, the objective is to increase the value of a company.  Understanding how the reputation of a company and its employees impacts value is a step to safeguarding the value created by Goodwill.

If you have questions about this or other valuation matters, please contact me.

©2011 Florida Business Valuation Group


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16 Feb

How long is a valuation valid?

Posted in General valuation topics on 16.02.11

In the world of valuation, all too often, appraisers answer valuation questions with “it depends”.  Unfortunately, the answer to the question, “what period of time is a valuation valid?” really is “it depends”.

Let me explain.  The value of an interest in a business appraisals is date specific.  It is easy to understand that the value of stock changes over time when we look at publicly traded stocks.  Rarely do prices remain the same from hour to hour, let alone day to day.  While the value of the stock of privately held companies usually do not change so quickly, the value can change.

Events and time can cause the value of a company to change.  In fact, most business owners count on the value of their investment in their businesses increasing over time.

So, depending upon the events and trends impact a particular company, the value can change over any given time period.  Changes in value can be caused be increases or decreases in sales and profitability, increases or declines in the value of assets owned by the Company, or any one of a number of factors.  For example, stock in a company which owns real estate in a market that is recovering from the recession will most likely change in value as the real estate market recovers and the real estate increase in value.  The increase in value can be compounded if the company is also recovering and has increased sales a profitability.

There is no absolute estimate for the period of time that a valuation will be valid.  If you are relying on an old valuation, the more recent it is,  the better the chances are the valuation will be valid.  Depending upon what you are using the value for, you may want to consult with your business appraiser to determine if an update is advisable.

If you have questions about this or other valuation matters, please contact me.

©2011 Florida Business Valuation Group


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04 Nov

Buy-Sell Agreements: The Appraiser, Standards and Defining Value

Posted in Buy-Sell Agreements on 04.11.10

In my last post, I talked about the types of buy-sell mechanisms in agreements. In this post I want to focus on how to identify the appraiser and how to define value in a buy-sell agreement. For more information on buy-sell agreements, you can purchase Buy-Sell Agreements for Closely Held and Family Business Owners.

The Appraiser
Not all appraisers are the same, and not all CPAs are appraisers. It is a good idea to specify in your buy-sell agreement that an appraiser with a certification from a recognized appraisal organization will be selected. The generally recognized designations are ABV (American Institute of CPAs), ASA (American Society of Appraisers), CVA/AVA (National Association of Certified Valuation Analysts) and CBA (Institute of Business Appraisers). You can also clearly identify the selection process. Remember that the more appraisers that are involved, the higher the cost and the longer the process will take.

The danger of specifying that the company’s accountant will determine the value of the company is that the company’s accountant may have no valuation experience. You would not go to your internist for heart surgery. Why would you go a general accounting practitioner without valuation training for valuation services? Credentialed appraisers have had training in valuation and usually have met some sort of experience requirement.

Applicable Standards
Each of the appraisal organizations has a code of ethics and professional standards. You can specify that the appraiser will perform the valuation in compliance with those standards. (Generally accepted accounting standards (GAAP) have nothing to do with valuation.)

Defining Value
Stock transferred for gift or estate purposes is valued for the tax reporting at fair market value: What a willing buyer would pay a willing seller, neither under compulsion to act, and both being informed of relevant facts. The fair market value of a minority (non-controlling) interest will usually have discounts for lack of control and lack of marketability, making it equal to less than a pro rata portion of the total company value.

Since the buy-sell agreement is your agreement, you can have the provision state whatever you choose. If you want the value to be a pro rata portion of the total company value, you just have to define value that way. (For shareholder disputes, depending upon the state, discounts for small companies are ignored.) Another option is to specify that discounts will not exceed a certain percent of value. The point is you can define value any way you want. You should understand the consequences of the definition that you use.

If you need assistance in understanding how the value stated in a buy-sell agreement will impact your company, please contact me.

©2010 Florida Business Valuation Group


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21 Oct

Buy-Sell Agreements and Business Valuations

Posted in Buy-Sell Agreements on 21.10.10

In my last post, you read about Chris Mercer‘s Buy-Sell Agreement triggers.  In this post, I want to highlight some different buy-out valuation mechanisms.

  1. Fixed price agreements –these type of agreements have a dollar amount for a buyout.  The actual price is stated in the agreement.
  2. Formula agreements –these type of agreement have a formula for determining value.  The formula can be as simple as stating the value is equal to book value on the day of the buyout or as complex as five times EBITDA plus cash and account receivable as of the last day of the month immediately before the buyout.
  3. Shotgun agreements – these type of agreements provide that the exiting shareholder offers the remaining shareholder(s) an offer to buy the shares and then the remaining shareholder(s) have the option to either choose to buy or sell his or her shares.
  4. Process agreements – agreement provides that an appraiser(s) determine the value of the interest at the time of the triggering event.

There are pros and cons to using each of the types of agreements.  If you are drafting an agreement you need to keep in mind what will happen if you have to buy or sell your interest under the agreement.  For example, in a shotgun agreement, will you have the funds to buy out the shares if the remaining shareholder elects to sell rather than buy?  More to the point, if the buy-sell were to be triggered by your disability, would you want to buy the shares?  If you are going to be purchasing life insurance to fund the buyout, it may be important to know what the value of the business really is.  A formula agreement makes it relatively easy to determine the price under the agreement, but the price may not equal the value.

The process agreement provides for the determination of the value when shares transfer hands.  However, care must be used in drafting these type of agreements.  There are a few options. The agreement can provide for each side to pick an appraiser and if the values of each appraiser are with 10% of each other, use the average.  If they are more than 10% apart, a third appraiser is selected by the two original appraisers.  While this methodology is fair, it takes a long time to have the appraisals finished, and can be very expensive.  A simpler alternative for the process agreement is to select an appraiser jointly when the agreement is signed, allow a neutral third party to select one appraiser, or have both sides submit names and agree to an appraiser when the time comes.  By only using a single appraiser, you can cut time and cost from the buy-out process and end up in the same place as using three appraisers.

My next post will address defining the value used in a buy-sell agreement.

©2010 Florida Business Valuation Group


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