Lisa Holton is a former business editor and reporter for the Chicago Sun-Times. Today, she heads The Lisa Company, a writing, editing, and research firm. She's a writer for corporations, colleges, and nonprofits nationwide, and has written more than 13 books.

Jim Bates is Vice President, Transaction Support, for the Christman Group, a middle-market investment banking firm based in Palatine, IL

Introduction 1

About This Book 1

Conventions Used in This Book 2

What You're Not to Read 3

Foolish Assumptions 3

How This Book Is Organized 4

Part I: What Business Valuation Means 4

Part II: Getting Familiar with Valuation Tools, Principles, and Resources 4

Part III: If You're Selling a Business 4

Part IV: If You're Buying a Business 5

Part V: Don't Try This at Home! Turning Things Over to the Valuation Experts 5

Part VI: The Part of Tens 5

Icons Used in This Book 6

Where to Go from Here 6

Part I: What Business Valuation Means 7

Chapter 1: The Value of Understanding Business Valuation 9

Basic Tenets and the Importance of Valuation for Businesspeople 10

Value differs from price 10

Planning drives value 10

No two valuations are exactly alike 11

Valuation isn't a one-time deal 12

The Basic Building Blocks for Calculating Value 12

Discount and capitalization rates: The numbers that really matter 13

Doing your homework: Due diligence 13

How rule of thumb enters into business valuation 14

Getting Expert Help 15

The Move toward Intangible Asset Valuation 16

Family Businesses: Important Valuation Targets 16

Chapter 2: What Triggers a Business Valuation? 19

Exploring Reasons for Wanting a Business 20

It's time for a new career 20

You're fulfilling a dream 21

You're taking advantage of a strategic opportunity 22

You're buying a business to pass on to your heirs 23

Shaking the Money Tree: How Lenders Make Thorough Valuation a Necessity 24

Borrowing to buy a business: What lenders want to see 25

Preparing for mergers and other big-money deals 26

Seeking new or continued funding for an existing business 27

Attracting public or private investors 27

What If You Want - or Need - to Sell a Business? 28

Doing some smart estate planning 28

Reaching retirement 29

Letting the kids take over 29

Facing threats from market forces 30

Separating from a co-founder or partner 30

Dealing with divorce 32

Exit Plans: Writing the Ending 32

Who benefits from an exit plan? 33

When should an exit valuation be done? 33

Chapter 3: Understanding the Tangibles and Intangibles of Business Valuation 35

Examining Your Reasons for Valuing This Business 36

Introducing Standards of Value 37

The mother of all standards: Fair market value 38

Perceptions of investment value 38

The fundamentals of intrinsic value 39

Going over going-concern value 39

Liquidation value 40

Adjusting or Normalizing a Financial Statement 41

Other Considerations: Science Meets Art 42

Adding business and economic news 42

Folding in tangible assets 43

Drawing valuation conclusions with intangible assets 43

Chapter 4: Approaches and Methods - Basic Theories of the Valuation Process 45

A Step-by-Step Overview of the Valuation Process 47

Risky Business: Gauging Circumstances for the Best Results 49

Understanding the different approaches 50

Calculating risk and its relationship to present value 55

Using discount and capitalization rates and income valuation methods 56

Chapter 5: The Challenge of Valuation in a Knowledge Economy 61

Moving from a Hard-Asset to an Intangible-Asset Economy 61

Reviewing types of assets 62

Recognizing the increasing value of intellectual property 63

Determining the Value of a Company Based on Ideas 64

The importance of real, documented income 64

What strategic buyers and lenders want to see 66

Reaching Intangible Value 67

Taking a stab at brand valuation 67

Recognizing customers as valuation drivers 69

Preserving Your Knowledge Business for the Future 70

Shaky times: When the founder's brain leaves the building 70

What owners need to do: Planning ahead 71

Part II: Getting Familiar with Valuation Tools, Principles, and Resources 73

Chapter 6: Getting Familiar with a Typical Valuation Report 75

What a Valuation Report Is Supposed to Do 76

Outlining a Typical Valuation Report 76

Cover 77

Valuation summary 77

Valuation assignment 80

Economic outlook 81

Industry outlook 82

Business overview 83

Conclusion of value 85

Appendixes 86

Chapter 7: Meeting the Supporting Players in the Valuation Process 87

Getting Help in Valuing Your Business 87

Recognizing situations that call for valuation experts 89

Finding the experts you need 90

Seeking the qualities your experts should have 91

Appraising What Appraisers Do 92

How appraisers are trained and certified 93

What appraisers cost 95

How to examine a business appraiser's work process 96

What to ask a prospective business appraiser 97

Taking Account of Accountants 98

How accountants are trained 99

How accountants are certified 100

What accountants cost 101

How to examine an accountant's work process 102

What to ask a prospective accountant 102

Hiring Advocacy: Attorneys 103

How attorneys are trained and certified 104

What attorneys cost 105

How to examine an attorney's work process 105

What to ask a prospective attorney 105

Brokers: One-Stop Valuation and Sale Services 106

How business brokers are trained and certified 107

What business brokers cost 108

How to examine a broker's work process 108

What to ask a prospective business broker 108

Chapter 8: Understanding Financial Statements 111

Gathering the Financial Data You Need 112

Looking into Support Data 112

External data 112

Internal data 113

Taking a Look at Financial Statements 114

The balance sheet 114

The income statement 118

Statement of retained earnings 122

Cash-flow statement 123

Ratios and formulas for valuation 126

Chapter 9: Using Rule-of-Thumb Valuations for Mom-and-Pop Businesses 131

What Rules of Thumb Do in Business Valuation 132

2008 Rules of Thumb from the Business Reference Guide 133

Full-service restaurants 133

Bars 135

Gift shops 137

Medical practices 138

Auto repair shops 140

Day-care centers for children 142

Dry cleaning 144

Coin laundries 146

Bookstores 149

Bed-and-breakfasts 149

Part III: If You're Selling a Business 153

Chapter 10: Making Sure You're Ready to Sell 155

Understanding Why Timing Is Important 156

Examining the Motivations behind a Potential Business Sale 156

Anticipating the owner's retirement 158

The kids are taking over! 158

Weighing the possibility of a merger or acquisition from a friendly suitor 159

Changing market conditions are threatening a company's future 159

Bringing Valuation into the Picture before You Bring In the Buyers 159

Providing a reality check 160

Transparency: Preparing for a sale 161

Heading off problems to increase value 162

Determining the Kind of Transaction You Want 165

Outright sale 166

Employee stock ownership plan (ESOP) 166

Ownership transfer to key family members 166

Chapter 11: Deciding What to Do about the Family Company 167

Planning for the Worst Possible Scenario 168

Examining the State of the Family Business 169

Specific characteristics of family companies 169

How families hurt the value of their businesses 170

Why "equal" in a family business isn't always fair 174

Getting Your Family Down to Business 175

Following a phased-in approach 176

Addressing the fairness question head-on 178

Setting up the best plan for the generations 178

Chapter 12: Due Diligence on the Sell Side 181

Looking at Why a Seller Has to Do Due Diligence 181

Understanding the Three Stages of Due Diligence 183

Tricks of the Trade: Collecting and Exchanging Information 184

Gathering your own company data 184

Protecting your company with a confidentiality agreement 187

Chapter 13: Case Study: Valuation on the Sell Side 189

Heading Off Common Valuation Disasters 190

Writing down your wishes 190

Making sure that your records are adequate 191

Taking time to plan 192

Considering confidentiality 192

Setting Up Your Prevaluation Plan 192

Finding the problems 193

Analyzing the prevaluation 195

Performing the Valuation 196

Taking valuation from fantasy to reality 196

Checking the structure of the deal 200

Looking at an example of a deal in progress 201

Part IV: If You're Buying a Business 203

Chapter 14: How Do You Know Whether You're Ready to Buy? 205

Knowing What Typically Drives a Business Purchase 205

Getting Ready to Buy 206

Tackling challenges unique to buyers 207

Looking at whether the business is right for you 208

Evaluating a failing business 209

Understanding how the mating process (typically) works 211

Restarting the Value Process 213

Chapter 15: Moving from Valuation to Negotiation 215

Knowing What Valuation Does for the...