Florida Real Estate Brokers Guide Sixth Edition Linda
Florida Real Estate Broker’s Guide, Sixth Edition Linda L. Crawford Edward J. O’Donnell Copyright © 2017 Kaplan, Inc. All rights reserved.
Unit 9 Basic Business Appraisal
Business Appraisals • Market value is not always the same as book value of a company • Certain accounting practices distort valuation • Business appraisers use ratio analysis • Persons who appraise businesses must have a real estate license or be a certified appraiser • Business appraisers need specialized training © 2017 Kaplan, Inc.
Business Appraisal Definitions • Supported, defended estimate of the value of a business • Going concern value—the business is likely to continue operations • Liquidation value—the business is not likely to continue operations © 2017 Kaplan, Inc.
Major Reasons for Business Appraisal • • • Sale or purchase Merger or acquisition Divorce Estate taxes Insurable value © 2017 Kaplan, Inc.
Business Appraisal Process 1. 2. 3. 4. 5. Define the assignment Establish date of appraisal Collect the data Analyze the data Prepare the estimate of value 6. Prepare the appraisal report © 2017 Kaplan, Inc.
Adjusting the Accounting Records • Estimates are necessary • Assets are reported at cost, not market value • Fully depreciated buildings may still have value • Assets or liabilities may be missing • Cash vs. accrual basis accounting • Inventory costing methods may differ © 2017 Kaplan, Inc.
Inventory Costing Methods • FIFO – First-in-first-out • LIFO – Last-in-first-out • Average © 2017 Kaplan, Inc.
Analyzing Financial Statements • Construct historical series of statements • Calculate financial ratios over time • Investigate unusual items and results – Increases in miscellaneous income – Unusual receivables – Slowing inventory turnover ratio © 2017 Kaplan, Inc.
Financial Ratios Ratio Formula Current Ratio Current Assets ÷ Current Liabilities Quick Ratio Current Assets (less inventory) ÷ Current Liabilities Inventory Turnover Ratio Cost of Goods sold ÷ Ending Inventory Debt-to-Worth Ratio Net Profit to Owner Capital Ratio © 2017 Kaplan, Inc. Liabilities ÷ Tangible Net Worth Net profit ÷ Total Capital
Preparing Statements for Valuation Purposes • Adjusted balance sheet – Removes items that don’t add to value • Market balance sheet – Items stated at market value rather than cost • Adjusted income statement – Removes items that will distort comparisons with other similar companies • Pro forma income statement – Best estimate of net income for next year or two © 2017 Kaplan, Inc.
Business Appraisal Approaches to Value • Sales comparison – Relationship between income and sales prices of comparable businesses • Cost-depreciation – Least effective valuation tool • Income capitalization – Uses capitalization rate of similar businesses • Liquidation value – Anticipated proceeds from distress sale © 2017 Kaplan, Inc.
Valuating Intangible Assets • Items like goodwill, franchises, copyrights • Methods of valuation include – Excess profits approach – Market residual approach © 2017 Kaplan, Inc.
The End © 2017 Kaplan, Inc.
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