The Portable MBA in Finance and Accounting, 3rd Edition

Business Valuation 623

until it is sold and the sales proceeds are received. We saw through the DCF
model that the value of the asset is the present value of the expected future
benefits. In valuing a minority interest, the emphasis shifts toward the future
benefits f lowing to the minority shareholder as opposed to the business overall.
For example, if a minority owner expects not to receive any distributions from
the business for 10 years even though the business is profitable, this is signifi-
cantly different from a business that makes annual shareholder distributions of
the profits. The values in these two situations would be considerably different.

BUSINESS VALUATION STANDARDS

Professional business appraisers follow certain standards when doing business
valuations. Business valuation standards include the following:

Uniform Standards for Professional Appraisal Practice—The Appraisal

Foundation.

Standards issued by various membership organizations such as American

Society of Appraisers, Institute of Business Appraisers, and National As-

sociation of Certified Valuation Analysts.

VALUE ENGINEERING

Just as the CEO of a public company tries to enhance the value of the shares,
management of a private company can work on increasing the value of the
business in anticipation of a future sale. Certain factors can have a significant
effect on the value of a typical closely held business. Management can focus on
these factors to potentially increase the future value of the business. Some of
the factors are obvious, while some are not. They include the following:

• Decrease expenses (increases cash f low/income).


• Increase revenues (increases cash f low/income).


• Significantly increase the earnings growth rate (may increase earnings
  projections, lower capitalization rate due to growth factor).


• Eliminate the owners’ personal expenses and perquisites (increases cash
  f low/ income, lowers buyer risk of inaccurate financial statements).


• Report all income on the financial statements and tax return (increases
  cash f low/income).


• Develop the management team for the possibility that the current
  owner(s) may leave the business upon a sale (lowers buyer risk of earn-
  ings volatility).


• Plan for the current owner-managers’ continuing employment under the
  new owner for a fixed period (lowers buyer risk of earnings volatility and
  loss of customers, employees, and vendors).