Valuing Small and Micro Businesses Using the Income Method
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- Why micro and small businesses are inherently more risky than larger businesses
- Issues with very small business and the Income Methods
- Who is an investor?
- Gordon Growth, Dividend Discount Model (DDM) issues
- Cash Flow Considerations
- EBITDA and Owner Market Compensation Issues
- Tax Affecting
- Suggested Solution
- When using Capitalization of Earnings (and sometimes terminal value)
- Adjustments for Working Capital, Debt, Cap X
- Review of projections and forecasts for use in Discounted Cash Flow Method
- Balance Sheet Accounts?
- Calculating a Discount and Capitalization Rate
- Buildup Method or BUM
- Industry Premium
- Size Premium
- Company Specific Premium
- Growth Rate (Capitalization Rate and Terminal Value)
- Terminal Value
- Gordon Growth
- Exit Multiple Approach
- Completing the Estimate of Value
- Next Period Cash Flow
- Excess Assets / Not enough assets
- Other Issues
- Mid-Year Capitalization Rate
- Weighted Average Cost of Capital
- Rule of Thumb – Finance Method
- Rule of Thumb – Discounted Cash Flow Estimates on unsupported cash flows
- Distinguish differing risk factors between large companies and micro and very small companies
- Collection of qualitative data, which I refer to as “soft data,” such as internal soft data (processes, management, etc.) and external soft data (economy, industry, etc.) and then the application of findings to valuation cash flows and risk adjustments
- Develop a discount and capitalization rate using the buildup method (BUM) for the income method as it pertains to micro and small businesses. Particular emphasis on industry risk and specific company risk and growth rate
- Review a projection or forecast to determine suitability as a cash flow for the discounted cash flow method
- Describe common missed cash-flow issues in the capitalization of earnings and/or terminal value year
- Explain integrating the balance sheet into micro- and small-business valuations. Considerations include estimating working capital and excess current assets, included and excluded assets and the effect on value found, and going-concern issues in capital-intensive industries
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