The MicroValuation utilizes a published reference source known as the Business Reference Guide (BRG), published by Business Brokerage Press and two databases of sold businesses known as Bizcomps founded and published by Jack Sanders, and DealStats (formally known as Pratt's Stats) founded by Shannon Pratt and published by Business Valuation Resources. This guide and these databases are utilized widely by business valuation analysts or BV professionals. They are the best sources for their relevant information for small, closely held businesses. A copy of the raw data from the Bizcomps Search and DealStats Search and a copy of the BRG data for the subject business are provided in our MicroValuation.
BRG, published by Business Brokerage Press, is the Business Brokers Handbook for valuing small businesses. It is comprised of over 800 pages and contains information on over 700 businesses. For more information go to www.businessreferenceguide.com.
Generally, a MicroValuation will include nine total values. Three values will be based upon Seller's Discretionary Earning (SDE) for the subject business provided by using the multiple of SDE from the BRG, Bizcomps and DealStats. Then an average of these three values is created. Similarly, three values based upon Revenues and an Average Value is provided from Revenue Multiples extracted from the same sources. Finally, the Average SDE Value and the Average Revenue Value are averaged as the final “Calculation of Value” or another value is selected as the final value.
While on occasion any of the four values could be chosen as the selected value for SDE or Revenues the average value is usually selected. Occasionally, a Seller’s Discretionary Earnings value multiple is not available from one or more of the sources. Consequently, there will not be nine values. Additionally, for some businesses Gross Profit, EBT, EBIT or EBITDA multipliers may be utilized in lieu of SDE or Revenues depending on the nature of the client’s business. Generally speaking, when another metric such as Gross Profit, EBT, EBIT or EBITDA multipliers is used the MicroValuation must be upgraded. Nevertheless, a final Calculation of Value is determined, and a brief explanation is provided.
Thus, eight results, four based upon SDE and four based upon Revenue (if all eight are available) are provided in tabular form in two separate Excel spreadsheets (one for SDE & one For Revenue). Then the selected results from each of the two Excel spreadsheets are averaged for our final “Calculation of Value”.
In the spreadsheets, each source with its selected or indicated multiple as well as the average multiple is listed. Next the “Seller Provided” Seller’s Discretionary Earnings or Revenue is shown. Seller’s Discretionary Earnings or SDE is also known as Adjusted Profit or Seller’s Discretionary Cash Flow. Next, the multiple from the respective source (Bizcomps, DealStats or BRG) is multiplied by either the SDE or Revenue depending on the spreadsheet. This is the operating value of the business for that particular multiple. Then Inventory, if applicable, is added to create the total business or “Enterprise” value. In some cases, the Fair Market Value (FMV) of equipment is added. When applicable additional value is added or deducted as well, and all is explained as necessary in the narrative. The result is a value for each multiple for Revenue, three in all and an average and a value for each multiple for SDE, three in all and an average, totaling eight values. Generally speaking, the final value is an average of the prior two averages (SDE and Revenue), unless another value is selected.
Inventory and equipment value are not added to the SDE Multiple Value in most cases. With respect to BizComps, Inventory is always added. However, with respect to DealStats it is not, as Inventory is considered to be included in the DealStat's SDE Multiple. With regards to the BRG, generally speaking, Inventory is added as well, but not in all cases. Additionally, in some cases, the BRG also adds the FMV of Fixed Assets.
Finally, the analyst, depending upon the circumstances, may need to add or deduct additional value. For example, there may be unique intangible assets, new products, etc, that may add value to the business. Alternately, there may be issues that reduces the value of the business. For example, the company may have one or two large customers that make up the majority of its client base which greatly increase risk and necessitates a reduction in value. There are many other circumstances that could cause an increase or reduction in value to any given business. Generally speaking, no additional value is added or deducted for the MicroValuation.
One advantage of utilizing these spreadsheets is that the client can change the SDE or Revenue amount to see what happens to price. In this manner a seller or buyer can determine the value based upon a higher or lower SDE for projections. Also, if due diligence proves the SDE to be higher or lower than originally entered, the corrected SDE can be entered to update the SDE Values.
A limited narrative is provided explaining the final Calculation of Value and any thoughts that Mr. Schmidt may have on the business. A brief explanation of a sentence or two (if necessary) will be provided on each result from the three public sources. Additionally, definitions on the various components, sources and acronyms, etc. are provided in a glossary of terms in the last appendix. Inventory and Fixed Asset Value, if and when added, will be explained for each multiple result. Where applicable any added value or deducted value will be explained. Finally, should the purchaser desire extended analysis or information it can be provided on an hourly basis at the discounted rate of $250 per hour. This is usually required if there are additional items to consider that increase or decrease value as noted earlier.
A copy of the raw data from the Bizcomps Search and DealStats Search and a copy of the BRG data for the subject business are also provided.
The BRG data and comparable data require a specific industry to be designated by either SIC Code-Standard Industrial Code or NAICS Code-North American Industry Classification System. Mr. Schmidt will help with this selection but the ultimate decision on the code to be used is the client’s responsibility. For more on these codes see www.siccode.com.