Welcome to the BizPricer®
Frequently Asked Questions (FAQ) Page
The following questions have been submitted by actual users and answered by the author of BizPricer Wizard software. Mnay of the Q & A's also apply to BizPricer Excel. The answers to the questions are provided as further background information for purchasers as they use the software to estimate a fair-market value for their particular business. In no way is this information intended to take the place of advice and guidance from competent legal and accounting professionals which should be sought by all parties before actually completing the purchase and sale of a business.
The FAQ's are organized under topic headings which best describe the theme of the question.
BIZPRICER OPERATIONAL QUESTIONS
Question (1): I am unable to get past the business information without the name and relationship of the individual providing the information. No entry is allowed in the relationship and "TBD" does not help. No entry is being saved.
Answer (1): The business valuation must always be named. BizPricer needs to track the data, save changes, etc. You can always Save, Change or Delete the valuation at any time. If you are concerned about using a real company name a fictitious name such as “XYZ” will work. If you want to change it later, you can without losing your data.
Question (2): Can BizPricer be used to print page numbers on the business valuation reports?
Answer (2): Not using BizPricer directly. However, once you have your final Report ready to print you can use pre-numbered printing paper. BizPricer does not provide page numbering to allow for the user’s customized reorganization and inserts in the Reports.
Question (3): On the income & expense reconstruction (screen S-05) there is a computation of the weighted average ACF. What is the weighting calculation given to each of the years available?
Answer (3): BizPricer uses a proprietary weighted-average formula to place more emphasis on the latest year's financial operating results and proportionately less on preceding years. The reasoning is that for business performance, the first past year tends to be more predictive of the future performance than each preceding year on a declining basis. The exact formulas are based on an analysis of many actual business sale transactions and are held as propietary to the BizPricer program.
Question (4): How does BizPricer calculate Available Cash Flow (ACF)?
Answer (4): BizPricer uses a reconstruction of income and expenses to reflect the true available cash flow in a business independent of non-cash expenses and discretionary items.
Question (5): How is the capitalization rate determined in the Multiplier Calculator?
Answer (5): The capitalization rate/multiplier is determined by using BizPricer's proprietary weighted-average of 18 risk factors which overall tend to be predictive of the business to grow or continue its past proven results. The risk factors and their relational weighting are based on an analysis of many actual business sale transactions and are held as proprietary to the BizPricer program. However, the individual weighting of each of the factors, and ultimately the overall multiplier is determined by the user's knowledge of the specific business being valued.
Question (6): How does BizPricer calculate Goodwill?
Answer (6): The formula is: the the Preliminary business value (average estimated available cash flow - ACF X the calculated multiplier) less the liquidation value of the Furniture, Fixtures and Equipment (FFE).
Question (7): Does BizPricer have a spell-check function?
Answer (7): No, but you can easily copy and paste your written BizPricer material into a text docucment such as Microsoft Word and use its spell-checker. Then just copy/paste your spell-checked wording back into the BizPricer valuation document.
VALUATION REPORT FORMATTING
Question (1): How can I remove the client's name and address that appears on the pages of the valuation reports?
Answer (1): The best way to do this is to "Save As" the valuation in "Open Existing Valuation" under a different name such as Valuation1. Then change the other company data appropriately to some non-identifying info such as Draft1 or just "A", etc. Now print and use the non-identifying valuation in whatever way you wish.
Question (2): I would like to do some reformatting of the BizPricer Valuation Reports before I use them with a client, potential buyer or take them to a bank. BizPricer has basic editing tools (compared to Microsoft Word) so how do I make the changes I want to make?
Answer (2): After you have competed your business valuation reports within BizPricer, use the Export function to Export the Valuation Reports in document format to yourself via email. Just open and Save the attachments that you have sent to yourself (they will automatically open in your primary word processing program when yopu click on them) and you will have the entire functionality of that program to "spiff up" your Reports to world-class professional level Reports.
Question (1): I have been using the BizPricer program for about six months with good success. I am now valuing a big company that has a lot of inventory. In the top portion of the reconstructed income and expenses screen, there are line items for beginning inventory and ending inventory, that in this process produces a total income figure. In this companys case, the inventory is semi-precious gemstones amounting to about $3,000,000. The end product is a three-year weighted income figure for the company. My question is this: On the Valuation Calculation screen, there is also a line entry for inventory. If the inventory figure has been included in the three-year weighted cash flow computation to produce that figure, do I also include that same number in the separate line for the inventory? If so, isn't that double-dipping? If not, why not?
Answer (1): It is not double-dipping, as you put it. On the Income and Expense Reconstruction screen BizPricer is using the difference between the Beginning Inventory and the Ending Inventory as a component of the Total Cost of Goods Sold which is then subtracted from the Total Income to arrive at Gross Income. In other words, the net difference between the beginning and ending inventory amounts is used in determining the income of the business, not the actual inventory value. So, with all other things being equal, a greater inventory at the end of the year contributes to gross income and a lesser inventory at the end of the year reduces gross income. On the Valuation Calculation screen the ending inventory is entered as an asset that is to be conveyed in the sale of the business and therefore contributes to the overall business valuation. This accounting process is not unique to BizPricer - it is a Generally Accepted Accounting Practice (GAAP) item.
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 Im 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.
IMPORTING AND EXPORTING A VALUATION
Question (1): I am experiencing difficulties with using the valuation Export function even though it has worked fine in the past. What can I do about this?
Answer (1): This problem has been determined to be a degradation of Registry links between BizPricer version 3 series and your computer's Microsoft Operating System (OS) Registry/Database. THIS IS NOT A PROBLEM WITH THE BIZPRICER PROGRAM. In other words, there is no BizPricer re-programming that can repair an issue that resides within your operating system.
The Registry is the heart of any Windows operating system. It contains information that controls how your system appears and how it behaves. Almost all Windows users gradually experience a downfall in their PC's performance and operational problems with certain software applications. Much of this can be attributed to Windows Registry Errors. These Errors can be introduced several different ways:
The registry keeps growing when you use Windows. As it does so, it attracts obsolete and unnecessary information, and gradually becomes cluttered and fragmented. "
Microsoft upgrades and patches to the OS that may break or reassign links (many PC users receive automatic upgrades from MS on a frequent basis).
Installation or upgrade of almost any new software program may introduce Registry link conflicts that degrade the operation of other software programs.
THE GOOD NEWS IS THAT THIS PROBLEM IS REPAIRABLE.
There are many companies that offer software that will clean and repair the linkages from your various software programs to your PC's Registry. Most of them have a modest pricer and there are even some free versions as well. Almost all of them offer a free analysis of your OS to identify the broken, missing, obsolete or redundant links before you commit to a solution. We tried one that identified 352 Registry Errors on our office computer before we purchased it (a one year license) for $29.95 and it worked perfectly. The BizPricer Export function was restored. The other good news is it also sped up other computer features such as launch time on a computer restart and it will fix any new Registry link errors for an entire year. We will not recommend a particular software program so we can remain unbiased and assure you that we have nothing to gain by you resolving this problem with your computer. Instead, if you use Google with a search term of registry repair you will find many reputable companies to choose from.
VALUATION CALCULATION METHOD
Question (1): How does BizPricer calculate the multiplier? I have a client who wants to understand the process.
Answer (1) : The individually assessed ratings from the 18 different risk factors are added together and divided by 18 for a simple average. The uniqueness of the multiplier comes from the variability of the individual assessed ratings that tailor the multiplier to the specific business being valued.
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
please send an email to us. Put BizPricer Question in the subject line.