Business Valuation: Market-Based Approach

Posted on May 3, 2013 by admin

By John T. Carter

The market-based approach to valuation compares one or more aspects of the subject company to the same aspect of other companies with an established market value, to determine the value of a company.

The variables in the market-based approach include which aspects of the companies should be compared, and which companies to select as comparables. In selecting the best comparable company it is ideal to select several public companies in the same or similar industries that are publicly traded and similar in size. Pratt’s Stats, Mergerstat, and BizComps are examples of commercial databases with statistics on companies both public and private.

The most commonly compared aspect of companies is some form of earnings, however, in some instances total revenue or book value may be more fitting. Any number of other financial criteria may be more or less useful to compare. Be sure to compare apples to apples with earning. Because taxable income can vary widely depending on financial and accounting considerations, one commonly used earnings calculation is net income before taxes, depreciation and amortization plus the value of the owner’s salary and fringe benefits, sometimes referred to as a seller’s discretionary earnings.

After selecting which aspects are to be compared, the market-based approach provides the value of the subject company by relating the value of the comparable companies on the basis of the particular aspects compared. For example, if comparable companies have recently sold for 5x EBIT, the subject company’s value should be about 5x its EBIT, and if comparable companies have recently sold for 2x book value, the subject company’s value should be about 2x its book value.

John T. Carter is a Partner with Witzke Berry Carter & Wander, PLLC in Bloomfield Hills, MI. Mr. Carter leads the firm’s Business Law and Commercial Transactions group and he has over 18 years of experience working with Michigan based organizations that service the health care, technology and professional services sectors. Follow John T. Carter on Twitter @johntcarter.

Nine tips for strategic alliances

Posted on May 1, 2013 by admin

By John T. Carter

Discover nine tips for a successful strategic alliance.

Hallmark, the world’s leading greeting card brand, announced a strategic alliance with Shutterfly Inc., a leading internet-based digital photo site. Their goal is to have “exclusive Hallmark-designed customizable cards featured on Shutterfly’s new personalized greeting card site, Treat.com.”

A strategic alliance is an arrangement between two companies that have decided to share resources to take on a specific, mutually beneficial project.

Strategic alliances differ from joint venture — which typically involve pooling resources to create an entirely new business entity — and allow companies to maintain their autonomy while embarking on a new business opportunity for mutual benefit.

Some of the keys to a successful strategic alliance are:

Develop a clear plan that will result in a profitable and beneficial business alliance that beats your current margins and justifies the effort;
Plan to make this relationship a long-term venture over the next three to five years;
Choose the right alliance – a partner who “deals honestly with associates, employees, and customers”;
Align your strategies and link them by operating principles;
Establish an agenda for negotiations and be sure to include items such as negotiating team, scope of partnership, and goals, roles, and obligations;
Obtain buy-in from every department, especially those who are responsible for the everyday responsibility of leading the alliance;
Determine the decision-making process and who must sign off;
Conduct an orientation meeting with everyone involved from both sides;
Identify a champion: the person who has the “ear of someone upstairs”; and because we want to give you more than we promised, here is an extra step,
Identify and track relevant success measures.

Strategic alliances allow for growth opportunities and market expansion that one company cannot alone accomplish.

Contact Michigan Business Attorney John Carter to discover if and how a strategic alliance could benefit you.

Different Forms of Partnerships

Posted on April 29, 2013 by admin

By John T. Carter

General Partnership

If you enter a general partnership, partners divide responsibility for management, liability and their portion of the business’ profits or losses. Shares are assumed to be equal unless a written agreement specifies otherwise.

Limited Partnership and Partnership With Limited Liability

In limited partnerships and partnerships with limited ability, most of the partners (based on their investment) have limited liability, in addition to limited input in management decisions. This can promote and help obtain investors for short-term project or for investing in capital assets. However, this type of ownership is rarely used for operating service or retail businesses. Limited partnerships have a more complex and formal structure than do general partnerships.

Joint Venture

Joint ventures are similar to general partnerships, but the partnership is formed for a clearly defined or limited period of time, or is formed for a single project.

Income-Based Approach: Valuation Basics in M&A Deals

Posted on April 26, 2013 by admin

By John T. Carter

The income-based approach to valuation in Mergers & Acquisition deals calculates the net present value of future income by applying a particular discount rate using a specific mathematical formula. For example, if you require a 25% return (compounded annually) on your invested money, how much would you have to pay today for a single lump sum payment of $1 million to be received five years from now. The following formula will determine that answer:

PV FV / (1 + i)^n

where

PV = present value

FV = future value

i = interest (or discount) rate per period

^n = raised to the nth power, where n is the number of compounding periods

PV = $1,000,000 / (I.25)^5

PV = $1,000,000 / 3.05175813

PV = $327,680

Next, how much would you pay today for a stream of income involving $100,000 payments each year forever if you require the same return on your investment?

PV = payment / interest (or discount) rate

PV = $100,000 / .25

PV = $400,000

These types of formulas are consistently used to value stable financial instruments like government and high quality corporate bonds, preferred stock dividends, annuities, and similar investments. A variety of mathematical formulas exist for valuing a number of payment streams, like payments that are expected to grow at a constant rate over time, and payments that continue for a specific number of years (like a redeemable preferred stock).

U.S. Treasury bond and notes are examples of low risk investment instruments, widely-traded in established markets, that these type of formulas value predictably well. With that said, when valuing a company, in particular a small, privately-held, owner-managed, and/or not well-established business, the projections of future income streams and the selection of a discount rate are often highly speculative. As a result, the formulas provide the science, but the art of projecting future income streams and determining an appropriate discount rate is equally significant.

At Witzke, Berry, Carter & Wander PLLC, we specialize in Merger & Acquisition deals. Contact us today and ensure you’re both prepared and informed for what is likely one of the biggest transactions of your lifetime.

Advantages and Disadvantages of a Sole Proprietorship

Posted on April 22, 2013 by admin

By John T. Carter

Advantages

One advantage to forming a Sole Proprietorship is that the business owners maintain total control over their business, and within the law, are able to make decisions as they deem necessary.

A second advantage is that forming and organizing a Sole Proprietorship is simple and inexpensive.

Next, Sole Proprietors obtain all the income generated by their business to either reinvest to hold on to.

Lastly, if offers flexibility because if desired, business owners can easily dissolve the sole proprietorship.

Disadvantages

Dissimilar to corporations, Sole Proprietorships have unlimited liability and are legally responsible for all debts made against the business.

Business and personal assets are at potential risk with unlimited liability in a Sole Proprietorship.

Sole Proprietorships occasionally have a difficult time attracting high-caliber or highly qualified employees, particularly those who are motivated by an opportunity to own a part of the business.

(Related: Type Of Business Formation)

Finally, Sole Proprietorships can be prove difficult when trying to raise fund and are often limited to using funds from consumer or personal loans.

Asset-Based Approach: Valuation Basics in M&A Deals

Posted on April 17, 2013 by admin

By John T. Carter

There a number of rules to consider when valuing a company in a Merger and Acquisition Deal. Despite personal opinions the ultimate value of a company in an M&A transaction is determined as that value which a willing buyer and a willing seller agree on and conclude the transaction.

An Asset-Based Valuation Approach is commonly used when there is an ongoing concerns of a very low or negative value of a business. Consider the value of an airline company for example: the airline has few routes, high labor and other operating costs, and is losing million of dollars each year. Using other valuation approaches, the company may have a negative value. But, in the eyes of one or more of the company’s existing competitors, the company’s routes, landing rights, leases of airport facilities, and its ground equipment and airplanes may hold significant value.

An Asset-Based Approach to valuing this company would value the company’s assets and aside from the money-losing business in which they are currently being utilized. Typically, the Asset-Based valuation approach will result in the lowest valuation of the three approaches for a profitable company, but it could result in a more accurate value based on the circumstances.

(Related: Type Of Business Formation)

Furthermore, the Asset-Based Valuation Approach may be appropriate to use in correlation with one of the other valuation approaches. Follow the link below to read more.

Pros and Cons of a Partnership

Posted on April 15, 2013 by admin

By John T. Carter

Pros

A partnership is easy to establish, but it is imperative that all potential partners commit the time necessary to establish the ground rules of the partnership.

Profits from a partnership go directly into each partner’s personal income tax return. Also, the government does not tax the partnership as a separate entity.
Often partnerships result in great incomes because two owners can be much greater than one.
If potential employees are given an opportunity to partner there is a greater likelihood they will be interested in employment with your company.

Cons

Their is added risk as partners are individually liable for the actions of the other partners.
Profits of one partner must be shared with the other partners.
An increasing number of partners leads to a greater potential for disagreements since partnership decisions are made by multiple parties.

(Related: Type Of Business Formation)

Partners may not be able to deduct some employee benefit expenses from their business income on their personal income tax returns.
Sometimes the partnership may have a limited life; e.g., partners may withdraw from a partnership or a partnership might dissolve upon the death of a partner.

Do I Need to Register a Trademark or a Service Mark for My Business Name?

Posted on April 10, 2013 by admin

By John T. Carter

With the growing prevalence of e-commerce, businesses are discovering that they are competing against companies all over the globe with identical or similar-sounding names. In a time when business was more locally based, this problem rarely occurred. But today, with internet acting as the Main Street, a business may be subject for an unpleasant surprise if the optimal domain name for their business has already been assumed. In order to protect the name of your business, you ought to consider registering for a trademark or service mark. In addition, you’ll want to register and reserve a domain name, even if you do not currently intend to publish a website.

What is a trade or service mark?

Trade or service marks do not have to be the full name of your business. Trademarks can include any symbol, word, device or name, or any combination, used, or intended to be used by you, in business to distinguish and identify your goods and services or their source from those of others.

A service mark is any symbol, word, device or name, or any combination, used, or intended to be used, in business to distinguish and identify the services and the source of services you offer to those provided by others.

Where do I search for trademarked names?

If you want to identify registered trade names visit your Secretary of State’s office or at the U.S. Patent and Trademark Office.

Business Type and its Restrictions On Naming a Business

Posted on April 8, 2013 by admin

By John T. Carter

How does the type of business I form impact what I can name my business?

Sole Proprietorship

A sole proprietorship typically operates under the name of the business owner. In the event you desire the use of a different name, most jurisdictions will require you to file a fictitious business name statement declaring that you are operating under an assumed or “fictitious name.” This informs local government and the public that your business is operating under an assumed name. Also, you may be required to publish the fictitious business name statement in the newspaper of general circulation in the county in which the principal place of business is located. Check with your city or county on the specific filing requirements that apply. Some people refer to fictitious or assumed names as “DBAs,” meaning “Doing Business As.”

Partnership

Similar to sole proprietorships a partnership name should include the surnames of the general partners. If you wish to do business under a different name, you must file a fictitious business name statement that indicates the assumed or fictitious name you have chosen.

Limited Liability Partnership (“LLP”)

You must reserve your business name with your Secretary of State’s office to form your business as a limited liability partnership. Typically, this is done when you file a certificate of limited partnership to register the LLP’s existence. The letters “L.P”, the words “limited partnership,” or some other phrase indicating that you are a limited partnership must be included in the name of your LLP.

Corporation

To form your business as a corporation you are required to adhere to a formal naming process. First, you must register the name with your Secretary of State and ensure it is both unique and not reserved for another corporation. A number of states require that certain abbreviations (e.g., “Inc.”, “Corp.”, “Ltd.”) or words (e.f., “Corporation”, “Incorporated”) appear in your corporate name to help the public easily identify your business as a corporation. Furthermore, if your corporation adopts a name that is not stated in its Articles of Incorporation, it may be required to file a fictitious business name statement.

Selling Your Business In A Merger & Acquisition Transaction

Posted on April 3, 2013 by admin

By John T. Carter

Selling your business in a merger and acquisition transaction is a difficult and often painful process. Many business owners are personally and emotionally invested into their company, making it difficult once the transaction is complete, and the company is sold. If you have invested time preparing for the sale, including clear post sale goals (e.g. personal, financial, retirement, legacy, etc.), you will alleviate much of the anxiety in separating from your company.

(Related: Type Of Business Formation)

Throughout the M&A planning and process it is important to talk with your family and friends to inquire about how they envision you spending your time after the sale. Consult with your financial advisor before beginning the merger and acquisition selling process to discover what you need to receive on an after-tax basis from selling your company to ensure you have the means to sustain the lifestyle you have grown accustomed to. This will prevent a false start if the sale of your company is unlikely to generate the necessary proceeds and you find this out at a later date.

There are efficient and effective merger and acquisition processes to selling a business, but it’s illogical to begin the process if your business’ value is insufficient to support your envisioned lifestyle. Business valuation is not an exact science. A number of valuation methods are in place to estimate the market value of a business from contrasting perspectives. The following methods are the most commonly used in mergers and acquisitions: discounted cash flow, multiple of earnings, multiple of cash flow and comparisons to prior sales of similar businesses. Each method will produce a different result and all methods are subjective as to applicability because each buyer uses a different method and as a result has a different valuation for the same business.

Contact Michigan Business Attorney John Carter to ensure the smoothest transition in your Merger and Acquisition.

The market-based approach to valuation compares one or more aspects of the subject company to the same aspect of other companies with an established market value, to determine the value of a company.

Share this:

Discover nine tips for a successful strategic alliance.

Share this:

General Partnership

Limited Partnership and Partnership With Limited Liability

Joint Venture

Share this:

Share this:

Advantages

Disadvantages

Share this:

Share this:

Pros

Cons

Share this:

What is a trade or service mark?

Where do I search for trademarked names?

Share this:

Sole Proprietorship

Partnership

Limited Liability Partnership (“LLP”)

Corporation

Share this:

Share this: