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Hundreds of thousands of small service businesses are operating in the United States. These include accounting, tax, and bookkeeping practices; barbers and hair stylists; chiropractic, primary care, and dental practices; veterinarians; landscapers, house cleaners, and pool servicers. These businesses are small by virtue of being owned by one or a few owners who, in addition to managing the business, provide personal services directly to their clients, patients, or customers. Specialty brokerage firms often mediate equity transfers of these types of businesses by utilizing well-accepted rules of thumb. Traditional asset, market, and income appraisal methodologies have failed to displace this reliance on rules of thumb in valuing these types of business. Michael Elmaleh introduces an alternative appraisal methodology, the fair commission model, which the presenter believes can provide a more useful and economically realistic way to appraise goodwill in these types of businesses. This model avoids the deficiencies in rules of thumb as well as the more traditional formal models.
Program Agenda
What are small service businesses?
What is Goodwill? Competitive advantage and transferrable customer bases.
Traditional appraisal approaches to valuing goodwill and their shortcomings:
Rules of Thumb
Market Methods
Asset Methods
Income Methods
Conceptualizing goodwill value as a fair commission rate
Why fairness is important to buyers and sellers of goodwill
Seller’s criteria for fairness
Buyer’s criteria for fairness
How traditional “earn-outs” embed fairness criteria
Value depends upon buyer: value should be based on synergistic buyers
Value should be based on discretionary earnings to prospective buyer
Goodwill value always has an upper bound. Three ways to compute upper bounds:
Maximum Competitive Advantage
Compete or Buy
Differential Compensation
Example 1: Dental Practice
Example 2: Landscaper
Abandoning False Certainty: The Shift to Probabilistic Forecasting
Key Forecasting Variables:
Transfer rate
Attrition rate
Discretionary Earnings per Customer per Year
Calibrated estimates and computer simulation
Components of computer simulation
Comprehensive Case Study: Barber Shop
Summary
Learning Objectives
Identify small service businesses that possess marketable goodwill
Examine the shortcomings of traditional appraisal approaches to valuing goodwill
Describe the alternative Fair Commission model to appraise goodwill
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