The PreQual Process

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There are three valuation approaches (market, income, and asset). A valuation approach is a broader framework or methodology used to determine the overall value of a business or asset. It represents the overarching strategy or perspective applied in the valuation process.

• Market Approach: Compares the subject business to similar businesses in the market that have been sold or valued.
• Income Approach: Focuses on the present value of the future income and cash flows generated by the business.
• Asset Approach: Values the assets of the business, often considering the net book value or replacement cost.

Valuation methods are specific techniques or procedures used within a particular valuation approach (market, income, and asset) to derive a numerical value. These are the detailed steps or calculations employed to assess the value of the business. Depending on the chosen valuation approach, various methods may be used under each approach.

• Comparable Private Transaction Method: The Comparable Private Transaction Method is a market approach used in business valuation to assess the value of a company by comparing it to similar private transactions in the market. This method relies on data from recent transactions involving the sale of ownership interests in comparable private companies. Analysts identify transactions with characteristics similar to the subject company, considering factors such as industry, size, and financial performance. By analyzing the pricing multiples and terms of these comparable private transactions, an estimate of the subject company's value can be derived. It is common for BizWorth to use the comparable transaction method because of the availability of past private transactions that are the relative size of the subject business.
• Guideline Public Company Method: The Guideline Public Company Method is another market approach that involves evaluating the subject company's value by comparing it to publicly traded companies. Valuation professionals identify a set of publicly traded companies that closely resemble the subject company in terms of industry, size, and other relevant factors. Key financial metrics, such as price-to-earnings ratios and market multiples, are analyzed to establish a valuation benchmark. The valuation of the subject company is then derived based on the average or median multiples observed in the guideline public companies.
• Prior Sales of Interest in Subject Company: This method involves examining the historical transactions of ownership interests in the subject company. Valuation professionals review past sales or transfers of shares within the company to understand the pricing and terms of these prior transactions. This information is valuable in assessing the market value of the subject company's ownership interests. By analyzing the prices paid in previous sales of similar ownership stakes, analysts can derive insights into the historical market value and use this data as a reference point for the current valuation.
• Capitalization of Earnings (Cash Flow) Method: The Capitalization of Earnings (Cash Flow) Method is an income approach used to estimate the value of a business based on its expected rate of return. This method involves capitalizing the business's projected earnings by dividing them by the capitalization rate. The capitalization rate represents the rate of return required by an investor to justify the investment. The result provides an estimate of the business value based on its ability to generate earnings over time. This method is often used for businesses with consistent and stable earnings.
• Multi-Stage Growth Method: The Multi-Stage Growth Method is an income approach that recognizes a business's potential for growth over multiple stages. Unlike traditional methods that assume a constant growth rate, the multi-stage growth method considers different growth rates for distinct periods. Valuation professionals project the cash flows for each growth stage, applying appropriate discount rates. This method is suitable for businesses with expected variations in growth rates over time. It provides a more nuanced valuation, accounting for the dynamic nature of a company's growth potential.
• Discounted Cash Flow (DCF) Method: The Discounted Cash Flow (DCF) Method is another fundamental approach within the income approach to business valuation. It involves estimating the present value of a company's future cash flows. Valuation professionals project the expected cash flows the business will generate over a specified period, usually five to ten years. These projected cash flows are then discounted back to their present value using a discount rate that reflects the time value of money and the risk associated with the business. The DCF method provides a detailed and comprehensive valuation by considering the entire cash flow timeline and is particularly suitable for businesses with predictable and stable cash flow patterns. This method may be used when a company expects a change in future capital expenditures (or revenue and expenses), anticipates high near-term growth rates to normalize at lower levels in the long term and/or has a reliable income projection.
• Book Value Method: The Book Value Method is an accounting-based approach used in business valuation. It calculates the value of a business by subtracting its total liabilities from its total assets, resulting in the net book value. This method relies on the company's balance sheet figures, considering the historical costs of assets and liabilities rather than their current market values. While the Book Value Method provides a straightforward assessment of a company's net worth based on its recorded financial data, it may not reflect the economic reality of the business, especially for companies with significant intangible assets or those in rapidly changing markets.
• Adjusted Net Assets Method: The Adjusted Net Assets Method is an enhancement of the Book Value Method that considers adjustments to the net book value of a business. Analysts make adjustments to the recorded assets and liabilities, accounting for factors such as market value fluctuations, the revaluation of assets, or the inclusion of intangible assets not reflected in the book value. This method aims to provide a more accurate representation of the business's economic value by considering adjustments that align with its current market conditions. The Adjusted Net Assets Method is particularly useful when the book value alone does not adequately capture the business's true value.

• Profit and Loss (P&L) Statement: Also known as the Income Statement, this document summarizes the revenue, costs, and expenses over a specific period. It provides insights into the business's profitability and operational efficiency.
• Balance Sheet: The Balance Sheet offers a snapshot of a company's financial position at a specific point in time. It details its assets, liabilities, and equity, showcasing the overall health and financial structure of the business.

• Addbacks: Addbacks are adjustments made to financials to account for non-recurring, or discretionary expenses. Examples include one-time legal fees or owner perks that may not reflect the ongoing operational costs of the business.
• Deductions: Deductions involve reducing reported figures to eliminate non-essential or extraordinary items. These adjustments aim to provide a more accurate representation of the business's financial performance by excluding non-operational or non-recurring items.

• Peer Comparable Analysis: This analysis involves comparing the subject company to similar firms based on characteristics such as company size, industry, region, and/or financial performance. Analysts assess various financial metrics, market multiples, and operational characteristics to gauge the business's relative position in the market.

• Valuation Summary and/or Executive Overview Section: Found within the business valuation report, the Valuation Summary Section offers a concise overview of the key findings derived from the valuation process. It includes the value of the business and highlights critical factors influencing the valuation, such as key assumptions, risks, and considerations.

Benchmarking ratios are financial metrics used to compare a company's performance against industry averages, competitors, or predefined benchmarks. These ratios provide insights into how well a company is performing relative to its peers or industry standards. Benchmarking ratios help businesses identify strengths, weaknesses, and areas for improvement. Common benchmarking ratios include:

Liquidity Ratios:

• Current Ratio: The Current Ratio is a measure of a company's short-term liquidity, assessing its ability to cover immediate obligations. It is calculated by dividing current assets by current liabilities. A ratio above 1 indicates the company has more assets than liabilities due in the short term.
• Inventory Turnover Ratio: The Inventory Turnover Ratio evaluates how efficiently a company manages its inventory by dividing the cost of goods sold by the average inventory. A higher ratio suggests effective inventory management, while a lower ratio may indicate overstocking.
• Days' Inventory Ratio: The Days' Inventory Ratio measures the average number of days it takes for a company to sell its entire inventory. It is calculated by dividing the number of days in a period by the inventory turnover ratio. A lower days' inventory ratio implies faster inventory turnover.

Asset Management Ratios:

• Net Fixed Asset Turnover Ratio: The Net Fixed Asset Turnover Ratio gauges how efficiently a company utilizes its net fixed assets to generate sales. It is calculated by dividing sales by the average net fixed assets. A higher ratio indicates efficient asset utilization.
• Asset Turnover Ratio: The Asset Turnover Ratio measures how effectively a company employs its total assets to generate revenue. It is calculated by dividing sales by average total assets. A higher asset turnover ratio indicates efficient asset utilization.

Debt Management Ratios:

• Times Interest Earned Ratio: The Times Interest Earned Ratio assesses a company's ability to meet its interest obligations. It is calculated by dividing earnings before interest and taxes (EBIT) by interest expenses. A higher ratio indicates better interest coverage.
• Debt-to-Equity Ratio: The Debt-to-Equity Ratio evaluates a company's financial leverage by comparing its debt to shareholders' equity. It is calculated by dividing total debt by shareholders' equity. A lower ratio suggests lower financial risk.

Profitability Ratios:

• Gross Profit Margin Ratio: The Gross Profit Margin Ratio indicates the percentage of revenue retained as gross profit after deducting the cost of goods sold. It is calculated by dividing gross profit by revenue. A higher ratio suggests better profitability.
• Operating Profit Margin Ratio: The Operating Profit Margin Ratio assesses a company's operating efficiency by measuring the percentage of revenue retained as operating profit. It is calculated by dividing operating profit by revenue. A higher ratio indicates efficient operations.

‍What does "prequalified loan eligibility range" mean?

The prequalified loan eligibility range signifies the potential amount a creditworthy buyer could secure from a participating lender to acquire a company. This range indicates the spectrum within which the lender may conditionally approve the loan, but it does not imply that the conditionally approved amount will necessarily be at the high or low end—it could fall anywhere within the specified range. The actual approved amount is contingent on the buyer's creditworthiness, the lender’s underwriting approval and other relevant factors.

 Why does the "prequalified loan eligibility range" matter for participating lenders?

For lenders, the loan eligibility analysis and valuation of the company, along with the company’s tax returns and financial statements, helps determine how much loan the business's cash flows can support, assuming the buyer is creditworthy. The detailed breakdown assists lenders in confirming that their proposed loan amount falls appropriately within the calculated eligibility range and does not exceed the value of the business.

 While lenders are not obligated to conditionally approve a specific loan amount, recognizing the unique and diverse criteria set by each bank, confirmation serves to: (1) conditionally approve a sum within the specified loan eligibility range, (2) affirm that the business has sufficient cash flows to support a loan amount within the eligibility range, and (3) demonstrate their financial institution's interest in providing a loan. Upon confirming a conditional approval, participating lenders convey their decision through BizWorth’s secure portal, initiating an automated email notification to the business owner and/or advisor.

 Why does the "prequalified loan eligibility range" matter for business owners and their advisors?

The significance of the"prequalified loan eligibility range" for business owners and their advisors lies in three key aspects.

 First, it serves as a critical tool to pinpoint any disparities between the assessed value of the business and its loan potential, emphasizing that these are distinct considerations. This identification of a gap prompts astute advisors to recognize the need for strategic planning to bridge the divide, involving alternative financing options beyond traditional bank loans. Such strategies may include exploring seller financing, considering additional cash down, contingency payments, and other creative financial solutions.

 Second, this understanding of a potential gap enables proactive business advisors to develop effective strategies aimed at aligning the business's value and its loan potential. By recognizing the divergence, they can tailor alternative financing approaches to ensure a more seamless and successful transaction.

 Third, the act of securing a"conditional approval" from a lender holds significant weight. Beyond the financial aspect, it elevates the business's credibility and enhances its overall appeal to potential buyers. This not only instills confidence in the business's financial standing but also signals to prospective buyers that the business is a secure and viable investment.

 In essence, the "prequalified loan eligibility range" becomes a strategic compass for business owners and advisors, guiding them through the intricate terrain of valuation,financing, and market appeal.

 Is "conditional approval" a guarantee that a buyer will secure a loan to purchase the Company?

Receiving a conditional approval does not guarantee that the buyer will ultimately secure a loan to purchase the company. Several factors may influence the final approval decision, such as the buyer's creditworthiness, the bank's underwriting process, changes in the business's cash flows, shifts in the industry outlook, alterations in economic conditions, and various other considerations. Nevertheless, obtaining a conditional approval from a participating lender is a significant step toward the buyer securing a bank loan for the purchase of the company.

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