Small Business Valuation Methods: How to Evaluate Small, Privately-Owned Businesses

Preface
A Practical Book
The Target of the Book
The Purpose of the Book
The Limits of the Book
Practical Reading of the Book
Contents
About the Author
List of Figures
List of Tables
1 Enterprise Value, Company Value, and Other Essential Financial Data
	1.1 Definition of Two Essential Aggregates
		1.1.1 Enterprise Value
		1.1.2 The Fair Market Value of Equity
		1.1.3 Case Study Showing the Differences Between the Two Aggregates
		1.1.4 Fundamental Equations
		1.1.5 Market Efficiency and Behavioral Finance
	1.2 The Strategic Positioning of a Company
	1.3 Method Comparison and a Few Recommendations
	1.4 Key Takeaways and Limitations
	References and Further Reading
2 Asset-Based Approach to Valuation
	2.1 The Net Worth of a Company
	2.2 Adjusted Net Asset Value Method
		2.2.1 Essential Income Statement Adjustments
			Adjustments Due to Under-Investments
			The Business’s Owner Remuneration or Compensation Package
			Lease Payments and Rents
			Exclusion of Non-recurring Items
			Case Study of a Normalized Income Statement
		2.2.2 Essential Asset Adjustments
			The Net Book Value, an Imperfect Valuation Measurement
			The Value of Intangible Assets
			Leased Assets on the Balance Sheet
			Real Estate Valuation Review
			Goodwill Impairment
		2.2.3 Essential Equity and Liability Adjustments
			The Fair Market Value of Loans
			Convertible Bonds Reclassified as Equity
			Provisions Reclassified as Equity or Debt
			Off Balance Sheet Liabilities
			Minority Interest of Non-controlling Interest
		2.2.4 Case Study of a Family Owned Real Estate Investment Company
		2.2.5 Adjusted Net Asset Value Case Study
	2.3 The Capitalized Excess Earnings or Goodwill Method
		2.3.1 Intangible Assets and Goodwill
		2.3.2 Implementation of the CEEM or Goodwill Method
			Excess Net Earnings
			Excess Operating Earnings
			Excess Earnings Duration
		2.3.3 Goodwill Valuation Case Study
			Company Euphoria Financial Details
			Excess Net Earnings Method
			Excess Net Operating Earnings Method
			Findings and Conclusion
	2.4 Key Takeaways and Limitations
	References and Further Reading
3 Fundamental Value or DCF Approach to Valuation
	3.1 Fundamental Value Definition
	3.2 The Two-Stage DCF Method
	3.3 Generalities on the Forecast and Scenarios
	3.4 Free Cash Flows
		3.4.1 Free Cash Flow to the Firm
		3.4.2 Free Cash Flow to Equity
		3.4.3 Company SEGI’s Free Cash Flows Case Study
			SEGI’s Operating Cash Flow
			SEGI’s Investment Cash Flow
			SEGI’s Free Cash Flow to the Firm
			SEGI’s Free Cash Flow to Equity
		3.4.4 Free Cash Flow Summary
	3.5 Cost of Equity
		3.5.1 The Methods Used
		3.5.2 The Issues and Ambiguities of the Risk Premiums
		3.5.3 Estimated Cost of Equity for a Small Business
		3.5.4 Implementation of the Build-Up Method
	3.6 Weighted Average Cost of Capital (WACC)
	3.7 Dividend Discount Model
	3.8 DCF Case Study (Company SEGY)
		3.8.1 Free Cash Flows and Assumptions
		3.8.2 Indirect DCF Method
			Step 1 of the Calculation
			Step 2 of the Calculation, Equity Value Estimate
		3.8.3 Direct DCF Method
		3.8.4 Estimated Equity Value
	3.9 Key Takeaways and Limitations
	References and Further Reading
4 Market Approach to Valuation
	4.1 Precedent Transaction Analysis
	4.2 The P/E Multiple Approach
		4.2.1 Potential Valuation Case Study
		4.2.2 P/E Dynamics
			The Credit Risk Factor
			The Estimated Growth in Net Income
			The Level of Interest Rates
		4.2.3 P/E Limitations
	4.3 The EV/EBITDA Multiple Approach
	4.4 Other Comparative Valuation Approaches
		4.4.1 The Price-to-Book Value Multiple
		4.4.2 Cash Flow Multiples
		4.4.3 Valuation with a Non-Financial Multiple
	4.5 Market Multiple Adjustments
	4.6 Case Study with the P/E and EV/EBITDA Multiples
		4.6.1 Company Y’s Financial Data
		4.6.2 Comparison Between the P/E and EV/EBITDA Multiples
		4.6.3 Equity Value Calculation with the Two Sector Multiples
		4.6.4 Equity Value Calculation with the Leader Multiples
		4.6.5 Equity Value Calculation with the Laggard Multiples
		4.6.6 Equity Value Overview
		4.6.7 The Business Valuation Professional’s Decision
		4.6.8 The Drawbacks of Historical Averages
	4.7 Key Takeaways and Limitations
	References and Further Reading
5 Full Valuation Case Study (Company SEGA)
	5.1 Generalities on the Applied Valuation Methods
	5.2 Presentation of Company SEGA
	5.3 Adjusted Net Asset Value
		5.3.1 The Adjusted Net Asset Value Method
			Income Statement Adjustments
			Balance Sheet Adjustments
			Adjusted Equity
		5.3.2 The CEEM or Goodwill Method
			The CEEM Using Excess Operating Earnings
			The CEEM Using Excess Net Earnings
		5.3.3 Asset-Based Equity Value Estimates
	5.4 Discounted Cash Flow Methods
		5.4.1 Valuation According to the Optimistic-Case Scenario
		5.4.2 Valuation According to the Pessimistic-Case Scenario
		5.4.3 DCF Value Estimates
	5.5 Precedent Transaction Analysis and Market Multiple Valuation
		5.5.1 Precedent Transaction Analysis
	5.6 Adjusted P/E Multiple
		5.6.1 Dividend Discount Model
		5.6.2 EV/EBITDA Multiple Valuation
		5.6.3 Market Value Estimates
	5.7 Estimated Equity Value of Company SEGA
		5.7.1 Results
		5.7.2 The Valuation Professional’s Decision
	References and Further Reading
General Bibliography, Webography, and Further Reading
Index