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(1) Why:
What is the purpose of the valuation?
(2) Who: Value with whom owning and managing the
business?
- Your current value with current ownership and management?
- Value with a new business owner with less experience?
- Value with buyer like you with similar business management experience?
- Value with an upscale buyer who has the financial ability to build on what you have accomplished in your business?
- These WHO questions make a huge difference to the final appraisal.
(3) Normalized Net Income:
I must understand what questions to ask to be able to determine the real 'Normalized Net Income.'
This figure is seldom what you see in your year-end accounting, which is generally calculated to determine the lowest amount of tax legally payable.
- Owners and families are often overpaid or underpaid depending upon individual tax situations.
- What would the owner have to pay someone to fill his/her position in the
business?
- There are about twenty more normalizing questions that must be answered and these can be different depending upon the answers given to previous questions.
This is where experience counts.
(4) Leasehold Improvements:
These need to be covered regardless of whether the building is leased or owned.
It is important that the right questions are asked in any comprehensive appraisal.
(5) Hard Assets:
Determining fair market value.
Book value means nothing if we want to know the true value of the business.
- Business Equipment
- Business Inventory
(6) Intellectual Property:
Copyright, Proprietary Processes, Business Operation Manuals.
These are your operating manuals; the step by step instructions on how to run your business and how to train others to operate your business.
This greatly affects value; positively if it you have them and negatively if you don’t have them, and much more negative if it would not be
possible for you to have a practical manual that would allow for your business to continue if you were unable to function.
(7) Value of Cash Flow:
This is calculated by finding the normalized net income then multiplying it by a ratio determined by risk, opportunity, and the intellectual property affecting the means to produce.
(8) Soft Assets:
Do you have intellectual property that has fair market cash value outside of your business?
(9) Risk:
What are the possible risks to your business?
No appraisal can be completed without properly understanding risk.
- How long is the business lease?
- Are there reasonable options to extend the lease?
- If the owner of the building also owns the business has the rent been paid at market rates?
- Are you in a one industry area, or is the area changing?
- Are industry trends your friend or enemy?
- Are there any Government regulations?
- Staffing?
- Competition and pricing challenges?
- Changes to accessibility? Road changes?
- How good is the succession plan, and do you even have one?
- Operations and Training Manuals - How complete?
- Additional questions depending upon the answers given.
(8) Value of Cash Flow:
This is calculated by finding the normalized net income then multiplying it by a ratio determined by risk,
opportunity, and the intellectual property affecting the means to produce the cash flow.
Depending upon the complexity
of your business, you can expect 48 hours to get a report back to you.
As you can well understand, no computer program, gross sales or other rule of thumb
guessing techniques are going to be helpful for you in determining the real value of your restaurant. In fact,
these techniques could harm you. Valuation and appraisal is our full time business. We do a lot of business valuations.
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