Lisa Holton is a former business editor and reporter for the Chicago Sun-Times. Today, she heads The Lisa Company, a writing, editing, and research firm. She’s a writer for corporations, colleges, and nonprofits nationwide, and has written more than 13 books.Jim Bates is Vice President, Transaction Support, for the Christman Group, a middle-market investment banking firm based in Palatine, IL

• Introduction 1About This Book 1Conventions Used in This Book   2What You’re Not to Read 3Foolish Assumptions   3How This Book Is Organized 4Part I: What Business Valuation Means 4Part II: Getting Familiar with Valuation Tools, Principles, and Resources   4Part III: If You’re Selling a Business   4Part IV: If You’re Buying a Business 5Part V: Don’t Try This at Home! Turning Things Over to the Valuation Experts 5Part VI: The Part of Tens   5Icons Used in This Book   6Where to Go from Here   6Part I: What Business Valuation Means 7Chapter 1: The Value of Understanding Business Valuation   9Basic Tenets and the Importance of Valuation for Businesspeople   10Value differs from price 10Planning drives value 10No two valuations are exactly alike   11Valuation isn’t a one-time deal   12The Basic Building Blocks for Calculating Value   12Discount and capitalization rates: The numbers that really matter   13Doing your homework: Due diligence   13How rule of thumb enters into business valuation   14Getting Expert Help   15The Move toward Intangible Asset Valuation 16Family Businesses: Important Valuation Targets 16Chapter 2: What Triggers a Business Valuation?     19Exploring Reasons for Wanting a Business 20It’s time for a new career 20You’re fulfilling a dream 21You’re taking advantage of a strategic opportunity 22You’re buying a business to pass on to your heirs   23Shaking the Money Tree: How Lenders Make Thorough Valuation a Necessity 24Borrowing to buy a business: What lenders want to see   25Preparing for mergers and other big-money deals 26Seeking new or continued funding for an existing business 27Attracting public or private investors 27What If You Want — or Need — to Sell a Business?   28Doing some smart estate planning 28Reaching retirement 29Letting the kids take over   29Facing threats from market forces 30Separating from a co-founder or partner 30Dealing with divorce 32Exit Plans: Writing the Ending 32Who benefits from an exit plan? 33When should an exit valuation be done? 33Chapter 3: Understanding the Tangibles and Intangibles of Business Valuation   35Examining Your Reasons for Valuing This Business   36Introducing Standards of Value   37The mother of all standards: Fair market value   38Perceptions of investment value   38The fundamentals of intrinsic value 39Going over going-concern value 39Liquidation value   40Adjusting or Normalizing a Financial Statement   41Other Considerations: Science Meets Art 42Adding business and economic news   42Folding in tangible assets   43Drawing valuation conclusions with intangible assets   43Chapter 4: Approaches and Methods — Basic Theories of the Valuation Process   45A Step-by-Step Overview of the Valuation Process   47Risky Business: Gauging Circumstances for the Best Results   49Understanding the different approaches 50Calculating risk and its relationship to present value 55Using discount and capitalization rates and income valuation methods   56Chapter 5: The Challenge of Valuation in a Knowledge Economy   61Moving from a Hard-Asset to an Intangible-Asset Economy 61Reviewing types of assets   62Recognizing the increasing value of intellectual property   63Determining the Value of a Company Based on Ideas 64The importance of real, documented income 64What strategic buyers and lenders want to see 66Reaching Intangible Value 67Taking a stab at brand valuation   67Recognizing customers as valuation drivers   69Preserving Your Knowledge Business for the Future   70Shaky times: When the founder’s brain leaves the building 70What owners need to do: Planning ahead 71Part II: Getting Familiar with Valuation Tools, Principles, and Resources 73Chapter 6: Getting Familiar with a Typical Valuation Report   75What a Valuation Report Is Supposed to Do 76Outlining a Typical Valuation Report   76Cover   77Valuation summary 77Valuation assignment 80Economic outlook 81Industry outlook   82Business overview   83Conclusion of value   85Appendixes   86Chapter 7: Meeting the Supporting Players in the Valuation Process   87Getting Help in Valuing Your Business   87Recognizing situations that call for valuation experts 89Finding the experts you need   90Seeking the qualities your experts should have 91Appraising What Appraisers Do 92How appraisers are trained and certified   93What appraisers cost 95How to examine a business appraiser’s work process   96What to ask a prospective business appraiser 97Taking Account of Accountants   98How accountants are trained   99How accountants are certified   100What accountants cost   101How to examine an accountant’s work process 102What to ask a prospective accountant   102Hiring Advocacy: Attorneys   103How attorneys are trained and certified   104What attorneys cost 105How to examine an attorney’s work process   105What to ask a prospective attorney 105Brokers: One-Stop Valuation and Sale Services   106How business brokers are trained and certified 107What business brokers cost   108How to examine a broker’s work process 108What to ask a prospective business broker   108Chapter 8: Understanding Financial Statements   111Gathering the Financial Data You Need 112Looking into Support Data   112External data 112Internal data   113Taking a Look at Financial Statements   114The balance sheet 114The income statement   118Statement of retained earnings 122Cash-flow statement 123Ratios and formulas for valuation   126Chapter 9: Using Rule-of-Thumb Valuations for Mom-and-Pop Businesses   131What Rules of Thumb Do in Business Valuation   1322008 Rules of Thumb from the Business Reference Guide   133Full-service restaurants   133Bars 135Gift shops 137Medical practices   138Auto repair shops 140Day-care centers for children   142Dry cleaning 144Coin laundries 146Bookstores 149Bed-and-breakfasts 149Part III: If You’re Selling a Business 153Chapter 10: Making Sure You’re Ready to Sell     155Understanding Why Timing Is Important   156Examining the Motivations behind a Potential Business Sale   156Anticipating the owner’s retirement   158The kids are taking over!   158Weighing the possibility of a merger or acquisition from a friendly suitor 159Changing market conditions are threatening a company’s future 159Bringing Valuation into the Picture before You Bring In the Buyers 159Providing a reality check 160Transparency: Preparing for a sale   161Heading off problems to increase value   162Determining the Kind of Transaction You Want   165Outright sale   166Employee stock ownership plan (ESOP) 166Ownership transfer to key family members   166Chapter 11: Deciding What to Do about the Family Company   167Planning for the Worst Possible Scenario 168Examining the State of the Family Business   169Specific characteristics of family companies   169How families hurt the value of their businesses 170Why “equal” in a family business isn’t always fair 174Getting Your Family Down to Business 175Following a phased-in approach 176Addressing the fairness question head-on   178Setting up the best plan for the generations 178Chapter 12: Due Diligence on the Sell Side   181Looking at Why a Seller Has to Do Due Diligence   181Understanding the Three Stages of Due Diligence 183Tricks of the Trade: Collecting and Exchanging Information 184Gathering your own company data   184Protecting your company with a confidentiality agreement 187Chapter 13: Case Study: Valuation on the Sell Side     189Heading Off Common Valuation Disasters   190Writing down your wishes 190Making sure that your records are adequate   191Taking time to plan 192Considering confidentiality 192Setting Up Your Prevaluation Plan 192Finding the problems 193Analyzing the prevaluation   195Performing the Valuation   196Taking valuation from fantasy to reality   196Checking the structure of the deal 200Looking at an example of a deal in progress 201Part IV: If You’re Buying a Business 203Chapter 14: How Do You Know Whether You’re Ready to Buy?   205Knowing What Typically Drives a Business Purchase 205Getting Ready to Buy 206Tackling challenges unique to buyers   207Looking at whether the business is right for you 208Evaluating a failing business 209Understanding how the mating process (typically) works 211Restarting the Value Process   213Chapter 15: Moving from Valuation to Negotiation   215Knowing What Valuation Does for the Dealmaking Process 216Identifying potential pitfalls and opportunities   216Timing the purchase well   216Minimizing emotional shocks   217Getting Ready to Meet the Seller   217Recognizing window dressing 218Remembering motives 218Knowing what sellers want   219Let’s Make a Deal: Negotiating   219Deciding whether to handle negotiations yourself   219Getting ready to negotiate 220Understanding what you should do in negotiation   222Working with someone who’s negotiating for you 223Chapter 16: Due Diligence on the Buy Side     225Seeing What Due Diligence Means in Practice   225Looking at the Unoffi cial First Stages of Due Diligence 226Researching the company 227Consulting your family and the pros   228The Informational Game Plan: Cracking the Books (and the Internet)   229Gathering the Company’s Data 231Knowing which questions to ask about the target company   232Checking with the company’s departments   233Collecting Outside Data about Your Industry and the Economy 235Chapter 17: Forensic Accounting and the Due Diligence Process     239Understanding Forensic Accountants 239Characterizing a qualifi ed forensic accountant   240Recognizing situations that link forensic accounting and valuation 243Comparing Basic and Forensic Accounting   246Recognizing Business Situations That Trigger Forensic Accounting   247Doing a Forensic Accounting Test   248Looking at Forensic Accounting Case Studies   249Chapter 18: Case Study: Valuation on the Buy Side     251Being Frank: Selecting an Industry 251Doing Research in Advance 252Contacting the Target   253Negotiating the quick-and-dirty valuation stage 253Knowing when to talk and when to hang up 254Moving on to Company Number Two   254Seeing How Failing to Consult an Advisor Can Cost You   255Knowing when to involve advisors 255Encountering problems   256Seeing what could’ve been done 258Checking Benchmarking Data 258Understanding Deal Structure   259Part V: Don’t Try This at Home! Turning Things Over to the Valuation Experts 261Chapter 19: Divorce   263Doing Estate Planning Regardless of Marital Status   263Planning Prenuptial and Postnuptial Agreements 264Breaking down a prenuptial agreement 265Creating a postnuptial agreement   267Seeking the Correct Professionals   267Looking at What Happens to a Family Business in Divorce   268State laws on splitting property   270The marital balance of power 271Determining the Business Value in a Divorce 272Keeping Valuation Dates in Mind 273Chapter 20: Estate Planning and Gifting     275Succession Planning: A Critical Part of Business Planning 276Considering Family Matters   276Anticipating problems   276Considering blended and nontraditional families   277Creating contingency plans for relatives who renege   278Creating a Succession Plan   279Creating an Estate Plan   280Finding the Experts You Need for Estate Planning   281Fitting Buy/Sell Agreements into Estate Planning and Valuation 282Taking Gifting into Consideration   283Gifting strategies 283Gifting techniques 284Chapter 21: Attracting Outside Investors to Your Startup     287Exploring Your Startup Resources 288Seeing How Valuation Professionals Work with Startups 290Creating the Starting Point: The Business Plan   291Working with Investors   292Angel investors   293Venture capitalists   294IPO investors 295Part VI: The Part of Tens 297Chapter 22: Ten Reasons to Consider a Prenup   299It Gets You to Talk Honestly about Money at the Start of a Marriage   300Your Life’s Work Shouldn’t Go down the Drain   300If Both Spouses Have Sacrificed to Build the Business, They Need to Share   301The Working Spouse Shouldn’t Lose the Business Entirely 302Kids from Earlier Marriages Need Protection 302Kids from Your Next Marriage Need Protection, Too   304Planning for Worst-Case Scenarios Is a Good Habit 304Your Business and Personal Finances Really Are Connected   305Family Legacies Need Protection 305When a Marriage Ends, a Prenup (Or Postnup) Can Save You Both Money 306Chapter 23: Ten Questions to Answer Before Considering a Partnership Agreement     307Who Will Be in the Partnership? 308How Much Capital Does Each Partner Have to Kick In at the Start?   308How Will Decisions Be Made? 309Do You Have a Plan for Resolving Disputes?   309How Will the Firm Admit New Partners? 310How and When Will Profits — or Losses — Be Shared?   310What Happens If a Partner Leaves or Dies?   311How Will the Partnership Be Sold or Dissolved?   311How Will Legal Disputes inside and outside the Partnership Be Handled? 312Will Noncompete Issues Be Covered?   312Chapter 24: Ten Things to Consider Before Transforming Your Company Into an ESOP     313Research How ESOPs Are Created 314Understand Why ESOPs Are Attractive in Certain Situations 314Know How the Tax Advantages Work   315Examine How Valuation Comes In   316Get a Handle on Your Launch Steps 316Prepare for Preparation Costs   317Get Ready to Train Next-Generation Leadership 317Plan Ongoing Training for Employees 318Estimate ESOP Costs after Launch 318Realize That ESOPs Can Fail   318Glossary 319Index 327