What Is A Business Appraisal

Before trying to understand how a Lubbock business appraisal is performed, it is essential to understand common words and terms used in the industry. A business appraisal is a general process of determining the economic value of a whole business or company unit. A business appraisal is more commonly referred to as a business appraisal, or erroneously as a business appraisal. A business appraisal can be used to determine the value of a business for a variety of reasons, including sale value, establishing partner ownership, taxation, and even divorce proceedings. Lubbock business owners will often turn to professional Lubbock business appraisers for an objective estimate of the value of the business.

Business appraisal topics are frequently addressed in corporate finance. Lubbock business appraisals are typically correlated to companies looking to sell all or a portion of its operations or looking to merge with or acquire another company. The appraisal of a business is the process of determining the current worth of a business, using objective measures, and evaluating all aspects of the business.

A Lubbock business appraisal might include an analysis of the company’s management, its capital structure, its future earnings prospects, or the market value of its assets. The tools used for Lubbock business appraisals can vary among appraisers, businesses, and industries. Common approaches to business appraisal include a review of financial statements, discounting cash flow models, and similar company comparisons.

Lubbock business appraisals are also important for tax reporting. The Internal Revenue Service (IRS) requires that a business is valued based on its fair market value. Some tax-related events such as sale, purchase, or gifting of shares of a company will be taxed depending on appraisal.

EBITDA

The value of a business can be determined by utilizing many methods. One common method utilized in Lubbock business appraisals is by multiplying a company’s EBITDA (earnings before interest, taxes, depreciation, and amortization) by a specific multiplier (e.g., 4x, 5x, 6x, etc.). Essentially, EBITDA is just the operating profit (not net income) of the company. In its most simple form, EBITDA is just revenues minus COGS (cost of goods sold) minus operating expenses (rent, utilities, salaries, etc.). The specific multiplier to apply to a Lubbock business is specific to the industry where the company operates and other factors such as size, profitability, and geographic reach. 

DCF

The DCF (discounted cash flow method) is just one of many methods to appraise a company. However, this method may be used to get a more accurate picture of the real value of the company, since it relies on the specific cash flows available to the owner. This method is based on projections of future cash flows, which are adjusted to get the current market value of the company. One of the main differences between the discounted cash flow method and the EBITDA multiplier method is that it takes inflation into consideration to calculate the present value. Another main difference is the EBITDA multiplier looks at the Lubbock based business’s historical EBITDA, whereas the DCF method looks into the future. 

Cash Flow

The term cash flow in business appraisal practice can mean many things to a Lubbock business owner. It can mean operating cash flow, net cash flow (before or after-tax), or net cash flow available for distribution to owners (e.g., dividends). Any of these measures of economic income can be used and analyzed. In theory, the value of a Lubbock business or an interest in the business depends on the future economic benefits that will accrue to that business, with the value of those future benefits being discounted back to a present value at some appropriate discount rate. When appraising a Lubbock business, we generally rely on “net cash flow to equity” (NCF). Net cash flow to equity is calculated below:

      Net income (after taxes)

+    Noncash charges (e.g., depreciation, amortization, deferred taxes)

•   Capital expenditures (net changes in fixed and other noncurrent assets)

+/-  Changes in net working capital

+/-  Net Changes in long-term debt

=     Net cash flow to equity

Professional Organizations

When deciding to hire a Lubbock business appraiser, it is important to understand what constitutes a professional appraiser. There are three primary business appraisal organizations in the U.S. including:

• National Association of Certified Valuation Analysts (NACVA)
• American Society of Appraisers (ASA)
• American Institute of Certified Public Accountants (AICPA)

There are other professional business appraisal organizations that have, over time, been consolidated into one of these three organizations. In all cases, the standards published by the above professional business appraisal organizations are considerably more detailed than the USPAP (Uniform Standards of Professional Appraisal Practice). 

Professional Accreditation

Many professional credentials have consolidated over the years. Today, there are three primary business appraisal accreditations available, including:

• CVA (Certified Valuation Analyst)
• ASA (Accredited Senior Appraiser)
• ABV (Accredited in Business Valuation)

A CVA is a great choice for any business seeking a Lubbock business appraiser. The CVA accreditation is issued by the NACVA, which is an association of CPAs, government valuers, and other professionals that perform appraisal services. Its purpose is to promulgate the member’s status, credentials, and esteem in the field of performing business appraisals of closely held businesses. 

To obtain a CVA designation, the Lubbock business appraiser must have a business degree and/or MBA (Masters in Business Administration) or higher. The appraiser must pass an eight-hour prequalification exam on accounting and comprehensive exam, including a 30-50 hour case study. The appraiser must have two years’ full-time or equivalent business appraisal or related experience or have performed ten or more business appraisals or demonstrate evidence of substantial knowledge. The Lubbock business appraiser must also have three personal, three business, and employer or CPA references.