EP 35: Frequently Asked Questions for April 10, 2020

Ed Mysogland  0:01  
Please welcome please welcome welcome. This is another episode of the defenders of business value podcast podcast where we talk about what makes a business valuable learn the tips and tactics to increase your company's value that only veteran dealmakers know. And now here's your host it miso glam.

Welcome to frequently asked question Friday, I'm your host Ed my sick land, I help business owners make sense of the value in their company so that one day they can sell it when they want, how they want and to whom they want. Each week, I answer three questions about business value or selling companies that come in from the website or social media. This is a little bit shorter of an episode, but hopefully, it will be helpful in your journey to making a saleable company. Alright, so let's get to it.

Okay, so the first question today is why can't you add the value of the equipment to a business value. As you'll remember, there are three approaches to valuation. So you have the asset, asset income and market approach. So under the asset approach, the underlying assets are used to generate the value of the business. So obviously, the assets play an integral part there, because that's what it is, it's the assemblage of assets. Now, under the market approach, or I'm sorry, under the income approach, you have tangible and intangible assets that are being used.

In order to generate earnings and those earnings, then we develop a forecast, that forecast then becomes a part of the model for the discounted future earnings. So you can see that you can't add assets over and above the the earnings because those assets are causing the business to generate earnings. And then lastly, we have the market approach, the market approach is completed deals and those completed deals back include the tangible assets. So

in order for you to

get a realistic valuation, you, especially under the income and market approach, you cannot add the assets or else you're double counting.

So our next question is how does the real estate affect business value. So those companies that have a real estate component to them, meaning that either it's within the the company itself or one company, there's two entities and they are, one is renting from the other.

Basically, the business has to pay fair market rent. So if you don't pay fair market rent, for example, if it's, if it's under fair market, that means that the earnings are higher than what it would be if if it would be fair market value. And what that does is it causes an oversight, overstating the business value. And likewise, if it's the other way, if it's overstating,

or you're paying more than fair market rent, its minimum it is understating the business value. So regardless of you know, whether you're going to buy the real estate or not, or if you're valuing that the collective entity, one way or the other, you need to to establish fair market rent because the buyer is going to, it's going to approach it in that fashion. Because the real estate needs to be at a in a value that

reflects fair market value for to pay the mortgage or to pay rent.

Last question of the day,

will business valuations change with online calculators? I'm in the middle of evaluating a couple of them now.

I think that generally speaking, the big data and algorithms are going to help folks like me come up with better numbers, I just think that there's going to be a lot of a lot more empirical data that's available. Now. I mean, certainly, I think the the downfall of any online calculator, regardless of how robust it is, it's the data in

and that's probably the greatest challenge that we see, especially downstream where we are looking at someone else's work. And basically when what it's normally not the platform's fault, it's the business owner, or whomever inputted the data. So right now I'm looking at biz equity and value builder. Well, I'm on the advisory board for value builder, so I know a lot about it. And you know, they're getting better.

I mean, I don't, I don't think it's necessarily going to replace folks like me that consult in and help companies position their company

For Sale, I think there there always needs to be that level of wanting to talk to somebody as opposed to just getting the number. You have to understand what those numbers mean in order to convince somebody else

of the value.

Well, that about wraps it up. But before you go, would you like to receive a weekly newsletter curated articles that I've stumbled upon or am writing about regarding business value and making a company saleable? Well, if so, go to defenders business value.com and sign up for the newsletter. Now, if you have a question that you would like answered, Go to Again, the website defenders of business value.com and push the appropriate button. Or you can email me at ed at defenders of business value.com Or you can reach me at Twitter at Ed miso. Thank you so much for spending time with me. If I can ever be of help to you in any way, please don't hesitate to reach out. Have a good weekend, and I'll see you next week.