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Ensure You Have a Qualified Appraisal |
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Volumes could be written as to what constitutes an acceptable level of work product that would pass the Daubert challenge, if litigated... |
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| Author: Biz |
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Nature and history of the business: The year formed and a cursory examination of financial summary is hardly adequate. Past transfers, examination of provisions in by laws, agreements, articles, legal documents and the impact of management’s skill, education, depth and health are several areas that should be commented upon whether the entity is an operating or asset holding company.
Economic and Industry Outlook: Businesses do not operate in a vacuum. In today’s economy capital for purchasing equity or debt to finance growth is difficult to come by even by banks and publicly traded companies. This has had a significant downward influence on most companies’ values. Tighter capital tends to reduce growth and curtail profitability. Some industries are prone to being impacted more than others. If the restaurant your used to making reservations 2-months now accepts walk-ins, rest-assured its value has likely declined. Averaging the past several years’ performance is counter-intuitive in this case. Think of a publicly traded company’s stock price after market analysts recommend a “SELL” from a “HOLD” position. The stock price is likely to take a 5% or 10% “haircut” (value reduction) based on current events, not solely historic.
Book value of the stock and business’ financial condition: Understand that the more the business relies upon tying up money in equipment, real property and inventory, the more likely the value will be more proximate to its book value. Conversely, a company with significant intellectual property and/or reputation, such as a service or technology business, will have most of its value associated with intangible assets, which will seldom be reflected on the company’s balancer sheet. The reliance on debt is favorable up to an optimal period; however, the higher the debt above this amount the greater the risk of insolvency. If there’s nominal discussion about these factors and the profitability and liquidity of the entity compared to external industry comparative data, then it’s inadequate.
Earning and Dividend-paying Capacity: Simply put, has there been a history of distributions and at what level and frequency. If the company is holding onto excess cash and investments beyond what it needs to grow the company (working capital needs); then these values would be stripped out and added back after the value of the operating company is determined. Management should have an understanding of cyclical issues, such as seasonality or varying costs of materials that allows it to hold what is needed with a reasonable cushion. Looking at officers’ compensation may also indicate, over- or under-compensation. These issues require the analyst to look at many line items on the financial statement, such as occupancy and labor to ensure they’re not influenced by related-party expenditures.
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