Frequently asked questions (faq)

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What is a business valuation?

A business valuation is an independent analysis used to estimate the economic value of a privately held company. Valuations are commonly used for transactions, litigation matters, tax reporting, ownership changes, and strategic planning

When do I need a business valuation?

Business valuations are commonly needed for:

• Selling or buying a business

• Partner exiting the compan

  or other ownership changes

• Estate and gift tax reporting

• 409A and equity planning

• Marital disputes (divorces)

• Strategic planning and exit preparation

Education Station:

Facts: You and I start a animal transportation company, called the Critter Shipper, when we are 20-year-old freshman in college with a combined $800 and a 1994 Ford Explorer.

Scenarios:

ONE: We are now 50-years-old, the Critter Shipper Corporation is known nationwide and is doing $2.6 million in sales each year and you would like to retire and sell your half of the company. Need a VALUATION to see what your half is worth today.

TWO: When we started Critter Shipper, we each $400 and we each got 100,000 shares. Now, the company is making millions and we want to bring in new investors. The investors want to invest $500,000. Wow. How many shares of ownership, or equity, do we give the investors in return for their $500,000 investment? Need a VALUATION to see what each share is worth today.

THREE: Same scenario, but instead of you retiring and cashing out, you want to start gifting 10% of your ownership in the company (which is 100,000 shares) each year to your only child because there are no tax implications for either of you, the giver or receiver, up to a certain dollar amount, or threshold ( $19,000 in 2025 per recipient. Note, there are other rules, but let's keep it simple). How many of your 100,000 shares can you gift before you reach the maximum of $19,000? Need a VALUATION to see what each share is worth. Need a VALUATION to see what each share is worth today.

FOUR: Same scenario, but instead of gifting or retiring, you are getting divorced and the judge says you must split everything you own 50/50 with your spouse, including those 100,000 shares in Critter Shipper. Need a VALUATION to see what your half is worth today.

FIVE: Scratch all of that. You are staying. But now, someone set fire to our largest transportation hub and we lost 60% of our vans used to transport and couldn't operate for a month. We hired a lawyer to sue the arsonist and they were found guilty. But, how much money did we lost while we were shut down? Need a VALUATION to quantify our lost profits.

FIVE: I am so sorry, but you have died. My condolences. The IRS requires your estate (what you own when you die) to pay taxes if your assets are over a certain dollar amount, or threshold. Most of us are beneath this threshold, but estates can certainly get complicated. The beneficiaries of Michael Jackson's estate found the IRS on the valuation of his estate all the way to the Supreme Court and won. I've had an estate with 26 companies and that was enough! Need a VALUATION to value your half of the company to see how much estate tax your heirs have to pay.

How much does a business valuation cost?

The cost of a business valuation can vary depending on the complexity of the company, the purpose of the valuation, and the amount of financial analysis required. Simpler engagements for a company's internal planning may require less time and documentation, while litigation support or complex ownership structures may require more detailed analysis. We typically begin with an initial consultation to understand the scope before providing an estimate. We will never exceed budget without discussing the overage with you and having your consent to do so.

How long does a business valuation take?

Most formal business valuation engagements take several weeks to complete, depending on the availability of financial information and the complexity of the business. The process typically involves reviewing financial statements, understanding the company’s operations, analyzing industry data, and developing valuation models. The quicker the client can upload the required documents, the faster we can start.

Frequently Asked Questions

Do we sign a contract?

Every engagement, no matter the purpose, cost, or size requires an engagement letter to be signed by both parties to ensure we are both on the same page before the engagement begins. The engagement letter covers the (i) scope (ii) timeline (iii) information request (iv) final deliverable and (v) payment terms. You want an engagement letter and should proceeds with caution with any professional who does not offer you one or something similar.

Do you require a retainer?

Yes, but generally a small amount. You have signed and agreed to the terms in the engagement letter. The final deliverable will not be released without receiving the project payment. If there's an issue. Call us. We have compassion even when technology or life does not. Generally, however, payment is due before final project is released.

What information is needed for a forecast or valuation?

A business valuation or financial forecast typically requires several types of information, including:

• Ownership structure and organizational documentsHistorical financial statements

• Audited financial statements, tax returns, or internally-prepared financial statements. You will want to provide the financials with the highest level of assurance, if possible. Audited financials have the highest level of assurance with internally-prepared financials having the least. (Makes sense, right? I can tell QuickBooks that my company made a gazillion dollars this quarter but there's no assurance.)

• Any budgets, forecasts, or long-range plans

• Any marketing materials or presentations which describe the general purpose and activity of the company

The specific information required will depend on the purpose of the valuation and the level of analysis needed

Does my company structure matter (LLC, C-corp, S-corp, etc.)?

No, the structure does not matter as long as your company is privately held. Companies such as Facebook, Apple, and Tesla sell their stock, or equity, to the public. To contrast, me and my brother started a plumbing company together and we own it, not the general public. (The term IPO is an "Initial Public Offering" and represents the first time a privately held company offers the general public an opportunity to buy stock, or invest, in their company.)

Do you offer refunds?

We will always do our best to be fair. There are no refunds once the final deliverable has been released to you. But, you and the consultant will review the draft version together prior to release. If a project is cancelled before the final deliverable is released, you will owe the fees incurred to date (hours spent on project to date x hourly rate outlined in your agreement). Just contact us. We will do what is right. After all, we have a fiduciary responsibility to you (like your lawyer or doctor).

B

Balance Sheet: A financial statement showing a company’s assets, liabilities, and equity at a specific point in time.

Beta: A measure of how much a company’s value or stock price moves relative to the overall market.

Benchmarking: Comparing a company's performance metrics to industry standards or competitors.

Book Value: The value of a company's assets minus liabilities as recorded on the balance sheet.

Break-Even Point: The point at which total revenue equals total expenses resulting in no profit or loss.

Burn Rate: The rate at which a company spends cash before generating positive cash flow.

Business Model: The way a company creates, delivers, and captures value.

Business Valuation: The process of determining the economic value of a business or ownership interest.

C

Capital Asset Pricing Model (CAPM): A financial model used to estimate the cost of equity based on risk-free rate, beta, and equity risk premium.

Capital Expenditures (CapEx): Funds used to acquire or upgrade physical assets such as property or equipment.

Capital Structure: The mix of debt and equity used to finance a company's operations.

Cash Conversion Cycle (CCC): The time it takes for a business to convert inventory purchases into cash from customers.

Cash Flow: The net movement of money into and out of a business.

Comparable Companies (Comps): Similar businesses used as benchmarks when estimating the value of another company.

Contribution Margin: Revenue remaining after variable costs are deducted.

Conversion Rate: The percentage of potential customers who complete a desired action such as making a purchase.

Cost of Goods Sold (COGS): The direct costs associated with producing the goods or services sold by a company.

Current Assets: Assets expected to be converted into cash within one year.

Current Liabilities: Short-term financial obligations due within one year.

Current Ratio: A liquidity ratio measuring a company's ability to pay short-term obligations.

D

Debt: Money borrowed by a business that must be repaid with interest.

Debt Financing: Raising capital by borrowing money from lenders.

Debt Service Coverage Ratio (DSCR): A ratio measuring a company’s ability to service its debt using operating income.

Debt-to-Equity Ratio: A financial ratio comparing total debt to shareholder equity.

Depreciation: The gradual reduction in value of a tangible asset over its useful life.

Discount Rate: The rate used to convert future cash flows into present value.

Discounted Cash Flow (DCF): A valuation method that estimates value by projecting future cash flows and discounting them to present value.

Discount for Lack of Control (DLOC): A reduction in value applied to ownership interests without control.

Discount for Lack of Marketability (DLOM): A reduction reflecting the difficulty of selling privately held shares.

Due Diligence: The investigation performed before completing a transaction.

E

EBIT: Earnings before interest and taxes.

EBITDA: Earnings before interest, taxes, depreciation, and amortization.

EBITDA Margin: EBITDA divided by revenue, measuring operating profitability.

Economic Profit: Profit remaining after deducting the cost of capital.

Economic Value Added (EVA): A performance measure calculating value created above the cost of capital.

Enterprise Value: The total value of a company including debt and equity.

Equity: Ownership interest in a company.

Equity Risk Premium: Additional return investors expect for investing in stocks rather than risk-free assets.

Earnout: A transaction structure where part of the purchase price is contingent on future performance.

F

Fair Market Value (FMV): The price at which a business would change hands between willing buyer and seller.

Financial Buyer: An investor or private equity firm acquiring a company for financial return.

Financial Statements: Formal records showing financial performance including income statement, balance sheet, and cash flow statement.

Fixed Costs: Expenses that remain constant regardless of production volume.

Free Cash Flow: Cash available after operating expenses and capital expenditures.

G

Goodwill: The value of a business beyond identifiable assets.

Gross Profit: Revenue minus cost of goods sold.

Gross Margin: The percentage of revenue remaining after subtracting cost of goods sold.

Growth Rate: The rate at which revenue or profits increase over time.

I

Income Approach: A valuation approach based on expected future income.

Income Statement: A financial report showing revenue, expenses, and profit over a period of time.

Intangible Assets: Non-physical assets such as patents, trademarks, and software.

Intellectual Property: Legally protected inventions or creations.

K

Key Performance Indicator (KPI): A measurable value used to evaluate business performance.

L

Leverage: Using borrowed funds to increase potential return.

Liabilities: Financial obligations owed by a business.

Liquidity: The ability to meet short-term financial obligations.

Letter of Intent (LOI): A preliminary agreement outlining key transaction terms.

M

Market Approach: A valuation approach comparing a company to similar businesses.

Market Capitalization: The total market value of a company’s outstanding shares.

Market Share: The percentage of total industry sales captured by a company.

Minority Interest: Ownership representing less than controlling interest.

N

Net Income: Profit remaining after all expenses are deducted from revenue.

Net Profit Margin: Net income divided by revenue.

Net Working Capital: Current assets minus current liabilities.

Normalized Earnings: Adjusted earnings removing unusual or non-recurring items.

O

Operating Expenses: Costs associated with running the daily operations of a business.

Operating Income: Profit generated from core operations before interest and taxes.

Operating Margin: Operating income divided by revenue.

Operating Profit: Profit from core operations before financing costs.

P

Profit: Revenue remaining after all expenses are deducted.

Profit Margin: The percentage of revenue that becomes profit.

Price-to-Earnings Ratio (P/E): A valuation ratio comparing share price to earnings.

Purchase Price Allocation (PPA): Assigning values to assets and liabilities acquired in a transaction.

Q

Quick Ratio: A liquidity ratio measuring ability to meet short-term obligations using liquid assets.

R

Return on Assets (ROA): Net income divided by total assets.

Return on Equity (ROE): Net income divided by shareholder equity.

Return on Invested Capital (ROIC): A measure of how efficiently capital generates profit.

Return on Investment (ROI): Profit divided by investment cost.

Revenue: Income generated from selling goods or services.

Revenue Growth Rate: The percentage increase in revenue over time.

Risk-Free Rate: The theoretical return on a riskless investment.

S

Scalability: The ability of a business to grow without a proportional increase in costs.

Strategic Buyer: A company acquiring another to create strategic advantages.

SWOT Analysis: A framework analyzing strengths, weaknesses, opportunities, and threats.

Synergies: Additional value created when companies combine.

T

Target Market: The group of customers a company aims to serve.

Terminal Value: The estimated value of a business beyond the forecast period.

Transaction Multiples: Valuation ratios derived from comparable business sales.

V

Valuation Multiple: A ratio comparing company value to financial metrics.

Variable Costs: Costs that change with production or sales volume.

W

Weighted Average Cost of Capital (WACC): The blended cost of debt and equity financing.

Working Capital: Current assets minus current liabilities representing operational liquidity.