Valuation-Methods-for-a-Company-1

Different Ways to Value a Business

by with No Comment Business

When it comes to valuing a business, there are many ways to examine a company’s profitability. Looking at a business’ liquidation value and its breakup value are two of many approaches to see how a company is functioning and how it might run under different management and economic environments.

Liquidation Value

This type of valuation can be defined as the difference between what tangible assets would sell for at auction minus outstanding liabilities. Typically, intangible assets are not considered in this type of valuation. However, if the intangibles along with the physical assets are considered for sale and not sold at auction, it would be considered a business’ “going-concern value.” Examples of intangibles include goodwill, brand recognition, patents, etc.

There are many considerations when exploring liquidation value. Generally speaking, the liquidation value is more than salvage value but less than book value. When a company is going out of business and assets are auctioned off, proceeds will normally be valued below the asset’s historical cost. Historical cost refers to how assets are reported on the balance sheet. However, if the market assesses assets lower in value compared to business use, it could be lower than book value.

Here is an example of how liquidation value can be calculated. Say a business has liabilities of $1.1 million. Based on the balance sheet, the book (or historical) value of assets is $2 million; and assets have a salvage value of $100,000. If the value of selling the business’ assets via auction is projected to be $0.80 per dollar, it could be expressed as follows:

$1.6 million (assets sold at auction at $0.80 per dollar) – $1.1 million (liabilities) = $500,000 (Liquidation Value)

Breakup Value

Also known as “the sum-of-parts value,” the breakup value determines the worth of a corporation’s individual segments if they were operating independently. Investors might pressure the company to spin off one or more segments into a separate publicly traded company to maximize its value.  

For each operating unit, the first step involves determining the segment’s cash flow, revenue and earnings. Such valuations can be benchmarked to publicly traded industry peers to determine comparative value of the business segment in question.

Financial ratios, including price-to-earnings (P/E) or price to free cash flow, are examples of starting points that analysts use to compare segmented business lines to industry peers to determine if it’s trading at below fair value, fair value or above fair value.

For example, if the P/E ratio of the company being analyzed is lower than its peers, it could mean the company is cheaper, or trading below fair value on an earnings basis. Though a more thorough financial analysis and assessment of macroeconomics is recommended, such as interest rates, inflation, etc., analysts could make an educated projection on how future earnings may or may not hold up in the future, compared to the business segment’s snapshot valuation.

Another way to evaluate is via discounted cash flows (DCF). This shows the segment’s future free cash flow projections through a discount rate, generally the weighted average cost of capital (WACC). The formula arrives at the present value of the business segment’s future cash flows. The following DCF example can tell the expected profitability and how to treat it going forward as part of the business:

Assume the company’s WACC is 10 percent; the amount invested is $5 million; it will last three years; and the annual estimated cash flows are as follows:

Cash Flow                           Discounted Cash Flow

Year 1: $2 million             $1,818,181.82

Year 2: $4 million             $3,305,785.12

Year 3: $6 million             $4,507,888.81

Compared to the amount invested of $5 million for the business’ selected business segment, the discounted cash flows for the project are $9,631.855.75. This could give an indication of how the business line might do if it’s spun off or how its performance will impact other lines of the business financially.

While valuation is subjective, especially in periods of volatile inflation and interest rate conditions, the more points of valuation analysis that occur, the better the chances that valuations will turn out to be correct.

TAX TIPS. text on white notepad paper on white background. near the table clock

6 Tax Tips for 2023

by with No Comment Tax

It’s that time of year again: tax time. And while many of your money-saving options might be limited after Dec. 31, there’s still a lot you can do to help lower your taxes, save money and avoid penalties. Here’s a quick snapshot.

Contribute to Your Retirement Accounts

Yes, doing this will help lower your tax bill. So, if you haven’t already maxed out your contribution for 2022, you can still do so up until April 18 for a traditional IRA (deductible or not), and a Roth IRA. If you have a Keogh or Simplified Employment Pension Plan (SEP), you can apply for a tax filing extension until Oct. 16; however, it’s best not to wait that long to contribute to those plans so you begin tax-free compounding. Plus, when you make a deductible contribution, your money will compound tax deferred. For instance, if you put away $5,000 a year for 20 years with an annual return of 8 percent, your $100,000 in contributions will grow to more than $250,000. Do you see these numbers? Gotta love this.

File a Form 2210

So last year, if you had an income windfall that arrived after Aug. 31, 2022, and you think you might owe taxes on it, you can file what is called an Underpayment of Estimated Tax. It will help annualize your estimated tax liability and possibly reduce any extra charges. That said, don’t try to pay too much. It’s better to owe the government than to expect a refund. As we all know, the IRS doesn’t give you any interest when they borrow money from you.

Itemize Your Deductions

While it’s so much easier to take the standard deduction, you could save a boatload when you do this, especially if you’re self-employed, own a home or live in a high-tax area. Here are couple ways to figure out if this option is right for you.

  • When your qualified expenses add up to more than the 2022 standard deduction of $12,950 if you’re single and $25,900 if you’re married.
  • If the portion of your medical expenses exceeds 7.5 percent of your 2022 adjusted gross income.

Take that Home Office Deduction

Good news: eligibility rules for claiming your home office deduction have been loosened, so for small business owners this is huge. And the rules apply even when you don’t have clients visit you in your office space. Here’s what you can write off:

  • Rent or mortgage interest
  • Utilities
  • Insurance
  • Repairs or maintenance
  • Depreciation
  • Housekeeping

Note: The percentage of these costs that are deductible are based on the square footage of your office within the context of the total area in your home.

Provide Dependent Taxpayer IDs

Don’t forget to enter Taxpayer Identification Numbers (usually Social Security numbers) for your children or other dependents. If you fail to do this, the IRS will deny you these important credits that might rightfully be yours, such as the Child Tax Credit. However, you’ll want to be careful if you’re divorced. Only oneof you can claim your kids as dependents. If you and your ex both claim your child, your return process will be detoured and they’ll be contacting you for more information. If you’re a new parent, be sure to get your child’s Social Security card as soon as you can so you’ll have it ready at tax time.

Consult a Professional

If you feel you need help or if your numbers aren’t where you’d like them to be, get in touch with your trusted tax specialist. You might be missing some critical info in your return that could help lower your tax obligation.

Taxes are a necessary part of life in the United States, so make sure you have all the right tools when diving in. When you’re well-equipped, chances are this process won’t be as much of a chore.

Sources

https://www.irs.gov/newsroom/how-small-business-owners-can-deduct-their-home-office-from-their-taxes#:~:text=The%20home%20office%20deduction%2C%20calculated,%2C%20maintenance%2C%20depreciation%20and%20rent

https://turbotax.intuit.com/tax-tips/tax-planning-and-checklists/tax-tips-after-january-1st/L8fY6OyFl