Download Valuation and Exit Strategies for Businesses: A Comprehensive Guide and more Quizzes Entrepreneurship Development in PDF only on Docsity! TERM 1 -subject to info asymmetry problem (seller knows more than buyer) -multiple methods are available -must be settled in negotiation DEFINITION 1 1. Why is it difficult to value a business for sale? TERM 2 adjusted balance sheet DEFINITION 2 four basic approaches to valuation:___ ___ ___: take each asset and estimate its market value, sum the value of assets to get liquidation value of company, subtract liabilities to get net worth, this is the absolute minimum price, this price is then multiplied by an Acquisition Premium based on industry data and can the perceived goodwill of the company TERM 3 market estimated value DEFINITION 3 four basic approaches to valuation:___ ____ ___: easiest and fastest, most common, take current (or projected) earnings, multiply by an industry multiple, industry multiples come from industry analyses, are estimated based on similar companies, there are many multiples, but the most common are P/E and EV/EBITA, they must be adjusted based on the companys perceived goodwill TERM 4 capitalization of earnings: DEFINITION 4 four basic approaches to valuation:____ __ _____:take adjusted earnings and divide by a capitalization rate, capitalization rates reflect the risk involved in the business, determined by industry norms, adjusted based on goodwill in the business, typical capitalization rates vary from .20 to .30 (but can be higher or lower depending on risk) TERM 5 discounted cash flows (or earnings): DEFINITION 5 four basic approaches to valuation:-____ ___ ___:estimate earnings for each of the next several years (as far as is reasonable given the stability of the business), discount each years cash flow by an appropriate discount rate, discount rate is the sum of expected returns plus a risk premium (industry and firm specific), estimate the value of remaining cash flows (after the 5th year and discount that back, a common way to do this is to take the 5th year earnings and *1/the discount rate, sum the discounted cash flows TERM 6 1.. sell/transfer ownership to insiders 2. Sell/transfer ownership to outsiders 3. Take the company public through an IPO 4.Bankruptcy DEFINITION 6 four main exit strategies: TERM 7 succession plan DEFINITION 7 -\____ ___: spells out how ownership will be transferred and who will have control over what (successor have to want it, must be up to the task, incumbents must trust successors) TERM 8 limited partnership; trust DEFINITION 8 -transferring across generations: biggest considerations usually involve taxes -___ ____transfers ownership to limited partners, but management is retained until successor is ready to become general partner -____trustees hold ownership for period of time after which beneficiaries receive stock. Entrepreneur retains control until stock is released (or death) TERM 9 managers DEFINITION 9 transferring to ____ -_____ know the company and are in best position to purchase (no information asymmetry) -____ can purchase directly or put money down and pledge to pay the entrepreneur the remainder with cash flow from the business TERM 10 leveraged buyout DEFINITION 10 -alternatively, managers can borrow money in a ___ ____where they pledge their stock as collateral (best for companies with hard assets and dependable cash flow)
