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Business Valuation Part 3: The Income Approach

Business Valuation Part 3: The Income Approach

This post is part of a 4-part series covering business valuation and providing guideline information on the process of valuing a business. To start at the beginning and learn what business valuation is and why a business valuation is needed, read Part 1: Levels of Value. For an in-depth look at the first valuation approach, read Part 2: The Asset Approach. Part 3: The Income Approach This income approach considers the expected periodic cash return that could be derived from an ownership interest in the equity of a company.  The periodic cash flow stream can be developed in two ways: based on a discrete cash flow period then capitalizing the cash flow of the final period to value the cash flows beyond the projected period or directly capitalizing a level of normalized cash flow. To apply this model, we determine cash flows available to the equity investor, or as debt free cash flow.  Cash flows available to equity investors are used if we wish to directly value equity, whereas debt free cash flows are used if we intend on valuing total invested capital or total enterprise value, because this is the cash pool from which interest and dividends or distributions could be paid to all invested capital holders.  Formulas to calculate free cash flow to equity holders and free cash flow to all invested capital holders are shown below:   Free Cash Flow to Equity Holders Net Income +   Depreciation & Amortization –    Capital Expenditures –    Increase in Working Capital +   Increase in Interest-Bearing Debt Free Cash Flow to Equity Holders   Free Cash Flow to Invested Capital Holders...
Business Valuation Part 2: Asset Approach

Business Valuation Part 2: Asset Approach

This post is part of a 4-part series covering business valuation and providing guideline information on the process of valuing a business. To start at the beginning and learn what business valuation is and why a business valuation is needed, read Part 1: Levels of Value. Part 2: The Asset Approach The asset approach is also referred to as the adjusted net asset approach or the net asset value approach. All these names generally mean the same thing. This method is most appropriate when valuing a holding company (an entity holding various investment assets such as real estate and/or securities) or when valuing a marginally profitable company.  Companies such as those are valued based on their underlying asset values. The asset values are adjusted to their fair market values and the sum of the adjusted asset values is reduced by outstanding liabilities to determine the net asset value (or equity value).  This is basically a modified liquidation value approach (true liquidation value would include liquidation expenses) and generally yields a floor value for a controlling interest. The following simplified example below illustrates the steps involved in using the asset approach. In this example, the company has assets with a book value of $500,000 and liabilities with a book value of $450,000. Typically, current assets (such as cash, accounts receivable and prepaid expenses) are assumed to be equal to their fair market value. It is also generally assumed that the book value of inventory is equal to its fair market value, however, this may not always be the case if there is stale or obsolete inventory still sitting on the books....
3rd Annual ABC Craft Championships

3rd Annual ABC Craft Championships

Every year the Associated Builders and Contractors, Inc. (ABC) hosts a local Craft Championship Competition where 3rd and 4th year apprentices in HVAC and Sheet Metal programs compete to win an all-expense paid trip to compete in the ABC National Craft Championship…

Financial Forecasting

Financial Forecasting

How do you manage the financial aspects of your company? Do you plan for future events or do you react as events occur?
Most companies do a reasonable job of preparing monthly financial statements.  However, these report on what has already happened. History!  A financial forecast provides a forward looking view that can be an incredible tool for managing your company…

“Bunching” Medical Expenses Will Be a Tax-Smart Strategy for Many in 2017

“Bunching” Medical Expenses Will Be a Tax-Smart Strategy for Many in 2017

Various limits apply to most tax deductions, and one type of limit is a “floor,” which means expenses are deductible only if they exceed that floor (typically a specific percentage of your income). One example is the medical expense deduction. Because it can be difficult to exceed the floor, a common strategy is to “bunch” deductible medical expenses into a particular year where possible. If tax reform legislation is signed into law, it might be especially beneficial to bunch deductible medical expenses into 2017. The deduction Medical expenses that aren’t reimbursable by insurance or paid through a tax-advantaged account (such as a Health Savings Account or Flexible Spending Account) may be deductible — but only to the extent that they exceed 10% of your adjusted gross income. The 10% floor applies for both regular tax and alternative minimum tax (AMT) purposes. Beginning in 2017, even taxpayers age 65 and older are subject to the 10% floor. Previously, they generally enjoyed a 7.5% floor, except for AMT purposes, where they were also subject to the 10% floor. Benefits of bunching By bunching nonurgent medical procedures and other controllable expenses into alternating years, you may increase your ability to exceed the applicable floor. Controllable expenses might include prescription drugs, eyeglasses and contact lenses, hearing aids, dental work, and elective surgery. Normally, if it’s looking like you’re close to exceeding the floor in the current year, it’s tax-smart to consider accelerating controllable expenses into the current year. But if you’re far from exceeding the floor, the traditional strategy is, to the extent possible (without harming your or your family’s health), to put...

EVENTS

WEBINARS

Benchmarking Your Key Performance Indicators

Benchmarking Your Key Performance Indicators

Many practice managers do not perform any kind of benchmarking and therefore never realize the true potential of their practice. With minimal improvements, a practice can see a significant increase in cash flow and a better bottom line.

Healthcare Denial Management

Healthcare Denial Management

Think your medical practice has a healthy revenue cycle? If you haven’t focused—really focused—on insurance denials, then think again. Denials might be the most underestimated and poorly understood sources of significant cash leakage from your practice’s revenue cycle.

Front Office Success

Front Office Success

Your front office is action-central for patient service and efficient patient flow. Hang on to your seats for this entertaining but illuminating webinar at how to prevent service breakdowns and blunders at this critical crossroads.

Meaningful Use: The Insanity Continues

Meaningful Use: The Insanity Continues

Don’t miss this webinar on the new changes to the meaningful use regulations. Many of these changes are beneficial and will relieve some pressures that practices were facing to manage compliance and reporting requirements.