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Business Valuation For Dummies®

Table of Contents

Introduction

About This Book

Conventions Used in This Book

What You’re Not to Read

Foolish Assumptions

How This Book Is Organized

Part I: What Business Valuation Means

Part II: Getting Familiar with Valuation Tools, Principles, and Resources

Part III: If You’re Selling a Business . . .

Part IV: If You’re Buying a Business . . .

Part V: Don’t Try This at Home! Turning Things Over to the Valuation Experts

Part VI: The Part of Tens

Icons Used in This Book

Where to Go from Here

Part I: What Business Valuation Means

Chapter 1: The Value of Understanding Business Valuation

Basic Tenets and the Importance of Valuation for Businesspeople

Value differs from price

Planning drives value

No two valuations are exactly alike

Valuation isn’t a one-time deal

The Basic Building Blocks for Calculating Value

Discount and capitalization rates: The numbers that really matter

Doing your homework: Due diligence

How rule of thumb enters into business valuation

Getting Expert Help

The Move toward Intangible Asset Valuation

Family Businesses: Important Valuation Targets

Chapter 2: What Triggers a Business Valuation?

Exploring Reasons for Wanting a Business

It’s time for a new career

You’re fulfilling a dream

You’re taking advantage of a strategic opportunity

You’re buying a business to pass on to your heirs

Shaking the Money Tree: How Lenders Make Thorough Valuation a Necessity

Borrowing to buy a business: What lenders want to see

Preparing for mergers and other big-money deals

Seeking new or continued funding for an existing business

Attracting public or private investors

What If You Want — or Need — to Sell a Business?

Doing some smart estate planning

Reaching retirement

Letting the kids take over

Facing threats from market forces

Separating from a co-founder or partner

Dealing with divorce

Exit Plans: Writing the Ending

Who benefits from an exit plan?

When should an exit valuation be done?

Chapter 3: Understanding the Tangibles and Intangibles of Business Valuation

Examining Your Reasons for Valuing This Business

Introducing Standards of Value

The mother of all standards: Fair market value

Perceptions of investment value

The fundamentals of intrinsic value

Going over going-concern value

Liquidation value

Adjusting or Normalizing a Financial Statement

Other Considerations: Science Meets Art

Adding business and economic news

Folding in tangible assets

Drawing valuation conclusions with intangible assets

Chapter 4: Approaches and Methods — Basic Theories of the Valuation Process

A Step-by-Step Overview of the Valuation Process

Risky Business: Gauging Circumstances for the Best Results

Understanding the different approaches

Calculating risk and its relationship to present value

Using discount and capitalization rates and income valuation methods

Chapter 5: The Challenge of Valuation in a Knowledge Economy

Moving from a Hard-Asset to an Intangible-Asset Economy

Reviewing types of assets

Recognizing the increasing value of intellectual property

Determining the Value of a Company Based on Ideas

The importance of real, documented income

What strategic buyers and lenders want to see

Reaching Intangible Value

Taking a stab at brand valuation

Recognizing customers as valuation drivers

Preserving Your Knowledge Business for the Future

Shaky times: When the founder’s brain leaves the building

What owners need to do: Planning ahead

Part II: Getting Familiar with Valuation Tools, Principles, and Resources

Chapter 6: Getting Familiar with a Typical Valuation Report

What a Valuation Report Is Supposed to Do

Outlining a Typical Valuation Report

Cover

Valuation summary

Valuation assignment

Economic outlook

Industry outlook

Business overview

Conclusion of value

Appendixes

Chapter 7: Meeting the Supporting Players in the Valuation Process

Getting Help in Valuing Your Business

Recognizing situations that call for valuation experts

Finding the experts you need

Seeking the qualities your experts should have

Appraising What Appraisers Do

How appraisers are trained and certified

What appraisers cost

How to examine a business appraiser’s work process

What to ask a prospective business appraiser

Taking Account of Accountants

How accountants are trained

How accountants are certified

What accountants cost

How to examine an accountant’s work process

What to ask a prospective accountant

Hiring Advocacy: Attorneys

How attorneys are trained and certified

What attorneys cost

How to examine an attorney’s work process

What to ask a prospective attorney

Brokers: One-Stop Valuation and Sale Services

How business brokers are trained and certified

What business brokers cost

How to examine a broker’s work process

What to ask a prospective business broker

Chapter 8: Understanding Financial Statements

Gathering the Financial Data You Need

Looking into Support Data

External data

Internal data

Taking a Look at Financial Statements

The balance sheet

The income statement

Statement of retained earnings

Cash-flow statement

Ratios and formulas for valuation

Chapter 9: Using Rule-of-Thumb Valuations for Mom-and-Pop Businesses

What Rules of Thumb Do in Business Valuation

2008 Rules of Thumb from the Business Reference Guide

Full-service restaurants

Bars

Gift shops

Medical practices

Auto repair shops

Day-care centers for children

Dry cleaning

Coin laundries

Bookstores

Bed-and-breakfasts

Part III: If You’re Selling a Business . . .

Chapter 10: Making Sure You’re Ready to Sell

Understanding Why Timing Is Important

Examining the Motivations behind a Potential Business Sale

Anticipating the owner’s retirement

The kids are taking over!

Weighing the possibility of a merger or acquisition from a friendly suitor

Changing market conditions are threatening a company’s future

Bringing Valuation into the Picture before You Bring In the Buyers

Providing a reality check

Transparency: Preparing for a sale

Heading off problems to increase value

Determining the Kind of Transaction You Want

Outright sale

Employee stock ownership plan (ESOP)

Ownership transfer to key family members

Chapter 11: Deciding What to Do about the Family Company

Planning for the Worst Possible Scenario

Examining the State of the Family Business

Specific characteristics of family companies

How families hurt the value of their businesses

Why “equal” in a family business isn’t always fair

Getting Your Family Down to Business

Following a phased-in approach

Addressing the fairness question head-on

Setting up the best plan for the generations

Chapter 12: Due Diligence on the Sell Side

Looking at Why a Seller Has to Do Due Diligence

Understanding the Three Stages of Due Diligence

Tricks of the Trade: Collecting and Exchanging Information

Gathering your own company data

Protecting your company with a confidentiality agreement

Chapter 13: Case Study: Valuation on the Sell Side

Heading Off Common Valuation Disasters

Writing down your wishes

Making sure that your records are adequate

Taking time to plan

Considering confidentiality

Setting Up Your Prevaluation Plan

Finding the problems

Analyzing the prevaluation

Performing the Valuation

Taking valuation from fantasy to reality

Checking the structure of the deal

Looking at an example of a deal in progress

Part IV: If You’re Buying a Business . . .

Chapter 14: How Do You Know Whether You’re Ready to Buy?

Knowing What Typically Drives a Business Purchase

Getting Ready to Buy

Tackling challenges unique to buyers

Looking at whether the business is right for you

Evaluating a failing business

Understanding how the mating process (typically) works

Restarting the Value Process

Chapter 15: Moving from Valuation to Negotiation

Knowing What Valuation Does for the Dealmaking Process

Identifying potential pitfalls and opportunities

Timing the purchase well

Minimizing emotional shocks

Getting Ready to Meet the Seller

Recognizing window dressing

Remembering motives

Knowing what sellers want

Let’s Make a Deal: Negotiating

Deciding whether to handle negotiations yourself

Getting ready to negotiate

Understanding what you should do in negotiation

Working with someone who’s negotiating for you

Chapter 16: Due Diligence on the Buy Side

Seeing What Due Diligence Means in Practice

Looking at the Unofficial First Stages of Due Diligence

Researching the company

Consulting your family and the pros

The Informational Game Plan: Cracking the Books (and the Internet)

Gathering the Company’s Data

Knowing which questions to ask about the target company

Checking with the company’s departments

Collecting Outside Data about Your Industry and the Economy

Chapter 17: Forensic Accounting and the Due Diligence Process

Understanding Forensic Accountants

Characterizing a qualified forensic accountant

Recognizing situations that link forensic accounting and valuation

Comparing Basic and Forensic Accounting

Recognizing Business Situations That Trigger Forensic Accounting

Doing a Forensic Accounting Test

Looking at Forensic Accounting Case Studies

Chapter 18: Case Study: Valuation on the Buy Side

Being Frank: Selecting an Industry

Doing Research in Advance

Contacting the Target

Negotiating the quick-and-dirty valuation stage

Knowing when to talk . . . and when to hang up

Moving on to Company Number Two

Seeing How Failing to Consult an Advisor Can Cost You

Knowing when to involve advisors

Encountering problems

Seeing what could’ve been done

Checking Benchmarking Data

Understanding Deal Structure

Part V: Don’t Try This at Home! Turning Things Over to the Valuation Experts

Chapter 19: Divorce

Doing Estate Planning Regardless of Marital Status

Planning Prenuptial and Postnuptial Agreements

Breaking down a prenuptial agreement

Creating a postnuptial agreement

Seeking the Correct Professionals

Looking at What Happens to a Family Business in Divorce

State laws on splitting property

The marital balance of power

Determining the Business Value in a Divorce

Keeping Valuation Dates in Mind

Chapter 20: Estate Planning and Gifting

Succession Planning: A Critical Part of Business Planning

Considering Family Matters

Anticipating problems

Considering blended and nontraditional families

Creating contingency plans for relatives who renege

Creating a Succession Plan

Creating an Estate Plan

Finding the Experts You Need for Estate Planning

Fitting Buy/Sell Agreements into Estate Planning and Valuation

Taking Gifting into Consideration

Gifting strategies

Gifting techniques

Chapter 21: Attracting Outside Investors to Your Startup

Exploring Your Startup Resources

Creating the Starting Point: The Business Plan

Working with Investors

Angel investors

Venture capitalists

IPO investors

Part VI: The Part of Tens

Chapter 22: Ten Reasons to Consider a Prenup

It Gets You to Talk Honestly about Money at the Start of a Marriage

Your Life’s Work Shouldn’t Go down the Drain

If Both Spouses Have Sacrificed to Build the Business, They Need to Share

The Working Spouse Shouldn’t Lose the Business Entirely

Kids from Earlier Marriages Need Protection

Kids from Your Next Marriage Need Protection, Too

Planning for Worst-Case Scenarios Is a Good Habit

Your Business and Personal Finances Really Are Connected

Family Legacies Need Protection

When a Marriage Ends, a Prenup (Or Postnup) Can Save You Both Money

Chapter 23: Ten Questions to Answer Before Considering a Partnership Agreement

Who Will Be in the Partnership?

How Much Capital Does Each Partner Have to Kick In at the Start?

How Will Decisions Be Made?

Do You Have a Plan for Resolving Disputes?

How Will the Firm Admit New Partners?

How and When Will Profits — or Losses — Be Shared?

What Happens If a Partner Leaves or Dies?

How Will the Partnership Be Sold or Dissolved?

How Will Legal Disputes inside and outside the Partnership Be Handled?

Will Noncompete Issues Be Covered?

Chapter 24: Ten Things to Consider Before Transforming Your Company Into an ESOP

Research How ESOPs Are Created

Understand Why ESOPs Are Attractive in Certain Situations

Know How the Tax Advantages Work

Examine How Valuation Comes In

Get a Handle on Your Launch Steps

Prepare for Preparation Costs

Get Ready to Train Next-Generation Leadership

Plan Ongoing Training for Employees

Estimate ESOP Costs after Launch

Realize That ESOPs Can Fail

Glossary

Business Valuation For Dummies®

by Lisa Holton and Jim Bates, MBA

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About the Authors

Lisa Holton: Lisa Holton heads The Lisa Co., an Evanston, Illinois–based writing, editing, and video consulting firm founded in 1998. She is a former business editor and reporter for the Chicago Sun-Times and a former editor for Thomson Corp. She is a busy writer for corporations, associations, and universities nationwide.

Holton has 26 years of experience writing about business, workplace, education, and investment topics and has written or co-written 14 books. Her titles include For Members Only: A History and Guide to Chicago’s Oldest Private Clubs (Lake Claremont Press), The Everything Guide to Mortgages (Adams Media), How to Be a Value Investor (McGraw-Hill), The Essential Dictionary of Real Estate (Barnes & Noble Books), and The Encyclopedia of Financial Planning (FPA Press). She also ghostwrites books for corporate professionals.

In 2005, she became a contributing writer for the Financial Planning Association on consumer finance and retirement planning issues. She also writes on corporate governance and business planning issues for a variety of publications, including Corporate Board Member magazine.

Since starting her company, Holton has written for national magazines and newspapers including the American Bar Association’s ABA Journal, Parents, American Demographics, Latina, Working Mother, The Boston Globe, and the Chicago Tribune.

She is a graduate of Northwestern University’s Medill School of Journalism and a former national board member of the Society of American Business Editors and Writers (SABEW). She is a current member of the Authors Guild, the International Association of Business Communicators, and the Society of Midland Authors.

Jim Bates, MBA: Jim Bates is vice president, Transaction Support, for the Christman Group, a middle-market investment banking firm based in Palatine, Illinois. He ran his own business valuation company after managing the business valuation division of a national consulting firm.

Bates’s responsibilities include providing the managing directors of Christman’s regional offices with complete transaction support, including but not limited to preparing business valuations, writing offering memoranda, doing industry research, identifying and contacting buyers, and helping with virtually every other aspect of serving clients. He has been involved in more than 30 sell-side engagements and has prepared more than 500 business valuations.

In his spare time, Bates is a competitive tennis player at the national level and serves the Professional Tennis Registry as its representative for Illinois. Currently, he is five-time defending champion of the Midwest Hardcourt, 35 and over, doubles championship. He has been playing and/or coaching tennis competitively for more than 25 years and is certified by the Professional Tennis Registry at the highest of its three levels.

He holds a bachelor of business/economics degree and an MBA with concentrations in finance and marketing from Western Illinois University.

Acknowledgments

Many of the people who contribute to the process of writing a book are unsung, so we’ll do the singing here.

We’d like to start by thanking Tom West of the Wilmington, North Carolina–based Business Brokerage Press for graciously allowing us to reprint excerpts from his rule-of-thumb industry bible, the Business Reference Guide.

Darrell Dorrell of Lake Oswego, Oregon–based Financial Forensics was a font of information on the forensic accounting field and a great storyteller regarding the criminal side of valuation and finance. Justin Cherfoli, managing director of the Dispute Advisory and Forensic Services Group of the Chicago-based financial advisory firm, Stout Risius Ross, provided great guidance and harrowing commentary on what some families go through in the valuation process.

Above all, Mike Adhikari of Business ValueXpress and the Kellogg School of Management at Northwestern University was a great conduit to basic valuation knowledge and many of the sources within this book.

We couldn’t have done this book without substantial help and support on the For Dummies side of the street. Natalie Harris, Chrissy Guthrie, and Stacy Kennedy worked tireless hours to make this book a reality.

Lisa would also like to thank her agent, Marilyn Allen of the Allen O’Shea Literary Agency in Stamford, Connecticut.

Jim would like to thank his family: Brad Bates, Mary Ann Bates, Mary Agnes Bates, and Meredith Spiering. Without their love and support, his career would not have been possible. In addition, he would like to thank his colleagues at the Christman Group: Pete Christman, Rich Jackim, Jack Emmons, and Anneke Chamy. Their feedback, experience, and friendship are invaluable.

Publisher’s Acknowledgments

We’re proud of this book; please send us your comments through our online registration form located at http://dummies.custhelp.com. For other comments, please contact our Customer Care Department within the U.S. at 877-762-2974, outside the U.S. at 317-572-3993, or fax 317-572-4002.

Some of the people who helped bring this book to market include the following:

Acquisitions, Editorial, and Media Development

Project Editor: Natalie Faye Harris

Acquisitions Editor: Stacy Kennedy

Copy Editors: Sarah Faulkner, Krista Hansing, Kathy Simpson

Assistant Editor: Erin Calligan Mooney

Editorial Program Coordinator: Joe Niesen

Technical Editor: Anneke Chamy

Editorial Manager: Christine Meloy Beck

Editorial Assistants: Jennette ElNaggar, David Lutton

Cover Photos: © David Muir

Cartoons: Rich Tennant (www.the5thwave.com)

Composition Services

Project Coordinator: Katherine Key

Layout and Graphics: Reuben W. Davis, Christin Swinford, Christine Williams

Proofreaders: Amanda Graham, Bonnie Mikkelson

Indexer: Infodex Indexing Services

Special Help: Christina Guthrie, Danielle Voirol, Amanda M. Gillum

Publishing and Editorial for Consumer Dummies

Diane Graves Steele, Vice President and Publisher, Consumer Dummies

Kristin Ferguson-Wagstaffe, Product Development Director, Consumer Dummies

Ensley Eikenburg, Associate Publisher, Travel

Kelly Regan, Editorial Director, Travel

Publishing for Technology Dummies

Andy Cummings, Vice President and Publisher, Dummies Technology/General User

Composition Services

Gerry Fahey, Vice President of Production Services

Debbie Stailey, Director of Composition Services

Introduction

No two businesses are exactly alike — even those that are part of a national chain with exactly the same sign on every door. Each business or outlet of a business has its own complexities that determine whether it’s worth a little . . . or a lot.

That’s why business valuation is actually a pretty complex affair for someone who’s never taken a finance class. If you go online or into a bookstore looking for books on business valuation, you’re likely to find volumes that are written more for people who’ve already been exposed to business finance, accounting, or management training. If you’re considering buying a business or have operated one for years without a lot of that training, we’re pretty sure that a complicated textbook isn’t what you need.

We think that valuation should be the first thing you think about before you make a move into or out of any business. Consider this book to be a starting point for a bright, well-informed future in buying or selling a business, because the dream of owning or selling a business should always begin with dedication to understanding the true value of what you’re buying. If we can give you an understanding of the basics of business valuation and of the tools and expertise you require to get the right valuation for the job, we’ll have accomplished our purpose.

About This Book

This book is very cautious because we think it should be.

We’ll state this upfront: This book will not make you qualified to handle most business valuation tasks by yourself. Nor will you have a complete background in business accounting or business law when you get to the last page. The purpose of Business Valuation For Dummies is to give you an overview of all the critical skills, issues, and methods involved in small-business valuation without taking you through all the detailed theories and number crunching necessary to the process. Other, more-advanced resources are out there to show you those processes when you’re ready. But by the time you’re done with this book, you’ll know which basic processes, resources, experts, and tools you need so you can put together the fairest and most affordable valuation solution for the business in question.

We tell you what various professionals do in the valuation process, but we don’t tell you that you can do their job. We also tell you the many steps you can follow to educate yourself about valuation in general and your target business in particular, as well as how to make the right decisions to get an accurate valuation of a business. For instance, you can consult resources, free or nearly free of charge, to build a baseline of the business you’re considering and then move on to the basics of valuing that kind of company. We tell you about those resources in this book, discussing rule-of-thumb valuation and other resources you can consult early in the process to start building knowledge. We encourage you to do this basic research before you even think about buying or selling a company. (And yes, even if you’ve owned a business for decades, you need to do this research before you sell!)

If we’ve done our job, this book will give you a thorough summary of all the steps in effective valuation and show you how to plan and execute that process. We give only two detailed examples of valuation in this book: one for the sale of a business and the other for a purchase. This way, you get a close-up look at how an isolated example works, which we think makes a lot more sense than attempting to generalize for every possible situation, which might mislead you.

This book adopts a holistic approach that involves expertise not only for business valuation but also for your personal and family finances. Why? The decision to buy or sell a business is a major life step; it’s not just about the business. Ownership is tied to one’s personal finances and family goals, and business valuation needs to tie into all those things. Even if you have a small business and a small family, getting advice tailored specifically to your circumstances is usually smart.

Last thing: Because one of the authors of this book is a valuation professional, you may say, “Oh, that’s why they keep saying to use an expert.” Keep in mind that we don’t say which experts you need to use; you have a choice. But anyone who wants to be in business needs to know that tax, valuation, legal, and finance issues are interconnected, and you need people with excellent skills helping you manage these subjects if you don’t have the expertise yourself.

Conventions Used in This Book

When this book was printed, some Web addresses — which appear in monofont — may have needed to break across two lines of text. If that happened, rest assured that we haven’t put in any extra characters (such as hyphens) to indicate the break. When you use one of these Web addresses, just type exactly what you see in this book, pretending that the line break doesn’t exist.

We use italics to highlight new terms, and we follow them up with easy-to-understand definitions.

What You’re Not to Read

If you want to lighten your reading load or just simplify your understanding of the concepts, take a pass on any text preceded by the Technical Stuff icon. Also, although we encourage you to check the chapters that have a significant amount of formulas and math in them (which we haven’t overdone, by the way), you may want to take a break on those or just save them for last. Finally, you can skip the sidebars — gray boxes containing related but nonessential text — if you want to get straight to the good stuff.

Foolish Assumptions

This book is designed for two kinds of people: those who are thinking about buying a business and those who are considering selling one. We consider this book to be optimal for people who want to go into business for themselves for the first time, because it addresses the critical knowledge that all good businesspeople have: the ability to maximize value at all times. Yet if you’re planning to sell a business, we provide a planning outline to allow you to maximize the value of your business before the for-sale sign goes out front.

Here are a few assumptions we make about you, the reader, whether you want to buy or sell:

You’re probably looking at a company of less (sometimes significantly less) than $5 million in annual revenues. This book focuses mainly on the purchase and sale of private companies — that is, companies that don’t trade daily on a major exchange.

You have some experience with the business world. However, we don’t assume that you have a background in finance or valuation, which are frankly two different and very complex disciplines.

More than anything, we assume that you don’t want to be taken to the cleaners on your first foray into business or your last decision with the business you own. Perhaps you’ve watched other people go into business, and you just know that they don’t have any idea what their business is truly worth; they’ve negotiated up or down with a seller, but they haven’t fully kicked the tires. That move isn’t the kind you want to make. You realize you need industry, financial, and operational knowledge to make the best decision.

How This Book Is Organized

Like all other For Dummies books, this book is divided into parts, and each part is divided into chapters. What follows is a summary of what you can see in each part of the book.

Part I: What Business Valuation Means

We start by telling you what business valuation is and why we think it’s the first thing you should understand about being in business. We talk about why valuation is such a challenge, and we give you the basic accounting approaches that experts take to uncover value — or the lack of it — in an organization. Last, we talk about the greatest valuation challenge today: how experts evaluate what intellectual property means to an organization.

Part II: Getting Familiar with Valuation Tools, Principles, and Resources

This part is where we spend the most time talking about paperwork, process, and expertise. We talk about what a valuation report looks like and what various professionals do in the valuation process; we offer a primer on financial statements and how they’re used in the valuation process. We also offer an important chapter that talks about rule-of-thumb valuation information — where it can help and where it can mislead.

Part III: If You’re Selling a Business . . .

People sell businesses for lots of reasons. They’re sick of running the business, for example; or they’ve made the business a rousing success that’s ripe for a nice price from a new owner; or they’re ready to retire or to pass on what they’ve built to the next generation. The reasons can vary, but one thing is clear: Planning for the sale of a business is something that you don’t do just a few months in advance. The planning takes years and is best thought of as part of a founder’s overall estate strategy. If you build a business, you want to get the best value for it in a way that allows you to enjoy the full rewards of what you created.

So if you’re trying to figure out what to do with a family-owned company, this part is for you. Family businesses supply an incredible amount of drama in the valuation process. This part also introduces a detailed case study on the sale of a fictional business.

Part IV: If You’re Buying a Business . . .

Knowing about basic valuation issues is the key to making a deal. Buyers have to do their own planning for a transaction because they may be going into business for the first time or buying another company in a series of companies to complement existing business interests. And of course, buyers have their own succession and estate-planning issues to deal with. In this part, we discuss valuation issues for the buyer and feature another major detailed case study, this one on the purchase of a particular fictional business.

Part V: Don’t Try This at Home! Turning Things Over to the Valuation Experts

The purpose of this part is not to win business for valuation experts, even though we clearly believe that these chapters cover situations in which you need help. The idea is to communicate why the complexity of certain valuation situations should encourage you to seek help.

This part includes three chapters that discuss situations in which business owners definitely shouldn’t go it alone. Which situations did we choose? Divorce certainly qualifies because it endangers many family companies. Estate planning and gifting are tied in with the value of the family business; therefore, they need joint coordination. Finally, people need valuation advice when they’re preparing to attract outside investors to a business.

Part VI: The Part of Tens

These three chapters offer ten points of interest each on the following topics: reasons to consider a prenuptial agreement, elements to build into a partnership agreement, and things to consider before transforming a conventional business to an employee stock ownership plan (ESOP).

Icons Used in This Book

This book uses the following icons to highlight key information.

Tip.eps This icon calls your attention to particularly important points and offers useful advice on practical financial topics. This icon saves you the cost of a yellow highlighter pen.

Remember.eps This icon serves as a friendly reminder that the topic at hand is important enough for you to put a note about it in the front of your wallet. The icon marks material that a college professor would put on the board before class starts, noting the important points that students should retain at the end.

Warning(bomb).eps This icon warns you about speed bumps and potholes on the valuation highway. Taking special note of this material can help you steer around a financial road hazard and keep you from blowing a fiscal tire. In short — watch out!

TechnicalStuff.eps This icon marks nonessential information, such as statistics and history lessons. The ideas here are interesting, but you can skip this text if you want to get back to the basics.

Where to Go from Here

We really enjoyed writing this book. We particularly like the idea that we can get small-business people thinking about the importance of valuation early in the life of a business.

If you know nothing about the business valuation process, we suggest you start with Part I. But this is a reference book, so feel free to jump around a bit. For example, you can see how specific situations are handled in Part V, and if you want to see detailed case studies on valuations, by all means, head to Chapters 13 and 18.

Part I

What Business Valuation Means

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In this part . . .

Many people think that business valuation is all about getting to a price for a business, and that’s certainly a big part of it. But we think that valuation is the central concept of what makes a business a business — and that very few people really understand it. In this part, we discuss the reasons valuation happens in a business, and we introduce the accounting concepts in the process. Most importantly, we discuss valuing business ideas.