Welcome to the BizPricer™ Wizard
Frequently Asked Questions (FAQ) Page

The FAQ's are organized under topic headings which best describe the theme of the question.

FURNITURE/FIXTURES/EQUIPMENT (F/F/E)

Question (1): Even though I know this question has been addressed in BizPricer I am still unsure how the furniture/fixtures/equipment (F/F/E) is calculated into the valuation. Obviously F/F/E will vary from company to company and can not be given an assumed value but I can't seem to find a line item in any of the screens that breaks this line item out. Have I missed it?

Answer (1): Well, yes and no. F/F/E is an integral part of the valuation calculation of a business. The Preliminary Value amount on the Valuation Calculation screen and the Business Valuation amount both include all of the F/F/E necessary for successful business operations. All variations of business valuation calculations, to my knowledge, do it this way, which is the correct way. However, you are asked to enter an estimated value for F/F/E on the Summary and Goodwill Calculation screen for BizPricer™ to calculate the Goodwill value (intangible value) in the business. At this point, all tangible assets are subtracted from the valuation calculation to determine the amount of the valuation that is attributable to Goodwill.

Question (2): In the Liquidation Value of F/F/E Box on the Valuation Summary Screen I’m asked to enter the liquidation value of all tangible assets necessary to the successful operation of the business. I would appreciate a little more description or guidance on how you calculate this "Liquidation Value" number as it is not as obvious to me as your documentation makes it seem.

Answer (2): The liquidation value of your tangible assets is the value you can expect to receive by selling the assets in a closing of your business. Most trade assets are valued at about 10-20 cents on the dollar of the new purchase price for similar assets. Of course there are exceptions; e.g. automotive, new computers and related equipment, high-end machinery, etc. This value determination is very specific to your particular business and you will need to provide a reasonable estimate of what you expect to be able to sell your assets for. But keep in mind that this has no bearing on the valuation of the business unless the liquidated value of the F/F/E exceeds the Preliminary Value calculated by BizPricer™ on the Valuation Calculation screen. In this case, the business you are valuing will most likely be worth more in liquidation of its assets rather than a sale as a going concern. This situation is very unlikely in a profitable business.

PROJECTIONS and PRO-FORMA'S

Question (1): What if I don't have any IRS Returns or other financials for past years and only have current year data?

Answer (1): BizPricer™ can also be used very successfully to develop a pro-forma business valuation. A pro-forma valuation is a valuation that seeks to project future sales and expenses and then base a valuation on the potential future attributes of the business. This is very useful for start-up businesses, businesses with very little financial history, and businesses that may have had some recent losing financial years but have a recent significant change that is expected to greatly improve the operating performance. Below are some actual directions from BizPricer for creating valuations with less than three years of data:

Using BizPricer™ to Develop a Pro-forma Valuation

BizPricer™ works very well as a tool to project future results of an existing or start-up business. A projection of future results based on realistic expectations is commonly referred to as a Pro-forma statement and when used in the BizPricer™ context of business valuation the process results in a Pro-forma business valuation.

Here's what to do:

1.   On the Income and Expenses Reconstruction screen change the fiscal year headings to either the three out-years to come (as of this writing in 2005 that would be 2006, 2007 and 2008) or use a simple numbering system such as Year 1, Year 2 and Year 3.

2.   Be sure to put the years in the order listed above, from left to right on the screen. This will put more weighting on the first projected year and the least on the third projected year. The premise of doing it this way is that the accuracy of projections decrease over the projected time periods and more reliance should be put on the first year of projections and less on the last year.

3.   Now enter your projected income and expenses. You may not want to enter many of the more specific items under the Operating Expenses so just delete the ones you don't want to use and create some new ones for your application. For example, you may want to use only an entry for Business Sales under Revenues, only zeros in the entries for Cost of Sales (including the Inventory data), and a minimal set of expenses such as; Advertising, Insurance, Office Expenses, Postage/Shipping, Rent, Salaries and Wages, Utilities and Miscellaneous (to all the other expenses you expect to incur.

4.   Don't try to change the Adjusted data for the Pro-forma unless you have included IBITDA and/or discretionary expense items. The easiest way is to not include these items in the Actual expenses to start with.

5.   Once you have completed this screen, proceed normally through the rest of the valuation screens. When you reach the Report creation part of the valuation be sure to add the words Pro-forma before the phrase “Business Valuation…” For example, “Pro-forma Business Valuation Letter Report.” Also similarly change any text in the Report to reflect the nature of the valuation such as in the Preface. You can also use the Review/Edit function in the left-hand BizPricer™ screen frame (after returning to the Home screen) to access the Report for changes.

Question (2): I have used your BizPricer program to do an initial valuation of our computer consulting business. We are looking to sell the business outright. However, when I did the business valuation the valuation price was approximately $21k. I was disheartened because I felt for that price it was not worth going through the hassle of selling. I used the same values for the Actual column as I did in the Adjusted column sections of the Income and Expense Reconstruction screen. The ACF ended up being $6k and the multiplier came out to be 3.53. Moreover, our revenues for the last 3 years were 2002-$21k, 2003-$60k, and for 200r-$118k and we have agreements in place with 3 companies this year for $192k. Our expected revenue for this year is about $250k+. I added the $192k value to the section "current assets to be conveyed in the sale" as an accounts receivable, and it vaulted the fair market value up to $211k from the $21k. Is this a fair way of accounting, this seemed to me to be more in the ball park of what I would expect, however, I realize that my viewpoint is very subjective. I suppose my overall question is: Do projected earnings and/or owner's income play any part in the selling price? If so, how do I write it up within the valuation?

Answer (2): It appears you have a verifiable growing business but I would not recommend to my buyer-clients that they pay for future increased expectations but rather they should concentrate on past actual results that have a reasonable expectation of continuing into the future. It is my opinion that future owners should reap the rewards of future sales and profits, not owners selling the business. In that case your business valuation will be quite low (as you point out). As I see it, you have at least three choices: (1) sell the business at the low currently calculated value (2) keep the business for the next two years and then bring it to market with a much higher valuation based on actual data or (3) do a pro-forma valuation where you use projected income and expenses for the next three years and try to sell the business with the resultant valuation from that calculation process. Be sure to clearly disclose to potential buyers that the information is projected and not actual. As I said above, I would not recommend to a buyer that they buy a business based on increased projected expectations when there is a verifiable track record to base a valuation on. Of course, buyers purchase businesses all the time based on pro-formas (for example, new franchises) but that is a somewhat different situation from yours. If you do use projected (pro-forma) figures in BizPricer™, be sure to disclose this fact to any potential buyers.

If you would like to ask a question you do not see answered
either here or on BizPricer Wizard's "Read Me First" and "Help" screens
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