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The valuation approaches yield the fair market value of the Company as a whole. In valuing a minority, non-controlling interest in a business, however, the valuation professional must consider the applicability of discounts that affect such interests. Discussions of discounts and premiums frequently begin with a review of the “levels of value.” There are three common levels of value: controlling interest, marketable minority, and non-marketable minority. The intermediate level, marketable minority interest, is less than the controlling interest level and higher than the non-marketable minority interest level. The marketable minority interest level represents the perceived value of equity interests that are freely traded without any restrictions. These interests are generally traded on the New York Stock Exchange, AMEX, NASDAQ, and other exchanges where there is a ready market for equity securities. These values represent a minority interest in the subject companies – small blocks of stock that represent less than 50% of the company’s equity, and usually much less than 50%. Controlling interest level is the value that an investor would be willing to pay to acquire more than 50% of a company’s stock, thereby gaining the attendant prerogatives of control. Some of the prerogatives of control include: electing directors, hiring and firing the company’s management and determining their compensation; declaring dividends and distributions, determining the company’s strategy and line of business, and acquiring, selling or liquidating the business. This level of value generally contains a control premium over the intermediate level of value, which typically ranges from 25% to 50%. An additional premium may be paid by strategic investors who are motivated by synergistic motives. Non-marketable, minority level is the lowest level on the chart, representing the level at which non-controlling equity interests in private companies are generally valued or traded. This level of value is discounted because no ready market exists in which to purchase or sell interests. Private companies are less “liquid” than publicly-traded companies, and transactions in private companies take longer and are more uncertain. Between the intermediate and lowest levels of the chart, there are restricted shares of publicly-traded companies. Despite a growing inclination of the IRS and Tax Courts to challenge valuation discounts , Shannon Pratt suggested in a scholarly presentation recently that valuation discounts are actually increasing as the differences between public and private companies is widening . Publicly-traded stocks have grown more liquid in the past decade due to rapid electronic trading, reduced commissions, and governmental deregulation. These developments have not improved the liquidity of interests in private companies, however. Valuation discounts are multiplicative, so they must be considered in order. Control premiums and their inverse, minority interest discounts, are considered before marketability discounts are applied.

Discount for lack of marketability

Another factor to be considered in valuing closely held companies is the marketability of an interest in such businesses. Marketability is defined as the ability to convert the business interest into cash quickly, with minimum transaction and administrative costs, and with a high degree of certainty as to the amount of net proceeds. There is usually a cost and a time lag associated with locating interested and capable buyers of interests in privately-held companies, because there is no established market of readily-available buyers and sellers. All other factors being equal, an interest in a publicly traded company is worth more because it is readily marketable. Conversely, an interest in a private-held company is worth less because no established market exists. The IRS Valuation Guide for Income, Estate and Gift Taxes, Valuation Training for Appeals Officers acknowledges the relationship between value and marketability, stating: “Investors prefer an asset which is easy to sell, that is, liquid.” The discount for lack of control is separate and distinguishable from the discount for lack of marketability. It is the valuation professional’s task to quantify the lack of marketability of an interest in a privately-held company. Because, in this case, the subject interest is not a controlling interest in the Company, and the owner of that interest cannot compel liquidation to convert the subject interest to cash quickly, and no established market exists on which that interest could be sold, the discount for lack of marketability is appropriate. Several empirical studies have been published that attempt to quantify the discount for lack of marketability. These studies include the restricted stock studies and the pre-IPO studies. The aggregate of these studies indicate average discounts of 35% and 50%, respectively. Some experts believe the Lack of Control and Marketability discounts can aggregate discounts for as much as ninety percent of a Company’s fair market value, specifically with family-owned companies.

Guideline Transaction Method or Direct Market Data Method

Using this method, the valuation analyst may determine market multiples by reviewing published data regarding actual transactions involving either minority or controlling interests in either publicly traded or closely held companies. In judging whether a reasonable basis for comparison exists, the valuation analysis must consider: the similarity of qualitative and quantitative investment and investor characteristics;  the extent to which reliable data is known about the transactions in which interests in the guideline companies were bought and sold; and whether or not the price paid for the guideline companies was in an arms-length transaction, or a forced or distressed sale. In regards to data reliability and both the guideline transaction method and the direct market data method, unlike real estate sales data, sales of privately held companies are neither actively traded or regularly reported to city or county recording offices, nor verified by these same local government offices. Sales of privately held companies are voluntarily reported by business brokers to data re-sellers or unscientifically accumulated by these same private, for profit data re-sellers. Consequently the data is considered, by the very nature of the data collection process, to be corrupted by sampling bias and nonsampling error, and of questionable reliability.

Market approaches

The market approach to business valuation is rooted in the economic principle of competition: that in a free market the supply and demand forces will drive the price of business assets to a certain equilibrium. Buyers would not pay more for the business, and the sellers will not accept less, than the price of a comparable business enterprise. It is similar in many respects to the “comparable sales” method that is commonly used in real estate appraisal. The market price of the stocks of publicly traded companies engaged in the same or a similar line of business, whose shares are actively traded in a free and open market, can be a valid indicator of value when the transactions in which stocks are traded are sufficiently similar to permit meaningful comparison.

The difficulty lies in identifying public companies that are sufficiently comparable to the subject company for this purpose. Also, as for a private company, the equity is less liquid (in other words its stocks are less easy to buy or sell) than for a public company, its value is considered to be slightly lower than such a market-based valuation would give.

Guideline Public Company method

The Guideline Public Company method entails a comparison of the subject company to publicly traded companies. The comparison is generally based on published data regarding the public companies’ stock price and earnings, sales, or revenues, which is expressed as a fraction known as a “multiple.” If the guideline public companies are sufficiently similar to each other and the subject company to permit a meaningful comparison, then their multiples should be similar. The public companies identified for comparison purposes should be similar to the subject company in terms of industry, product lines, market, growth, margins and risk.

The value of asset-based analysis of a business is equal to the sum of its parts. That is the theory underlying the asset-based approaches to business valuation. The asset approach to business valuation is based on the principle of substitution: no rational investor will pay more for the business assets than the cost of procuring assets of similar economic utility. In contrast to the income-based approaches, which require the valuation professional to make subjective judgments about capitalization or discount rates, the adjusted net book value method is relatively objective. Pursuant to accounting convention, most assets are reported on the books of the subject company at their acquisition value, net of depreciation where applicable. These values must be adjusted to fair market value wherever possible. The value of a company’s intangible assets, such as goodwill, is generally impossible to determine apart from the company’s overall enterprise value. For this reason, the asset-based approach is not the most probative method of determining the value of going business concerns. In these cases, the asset-based approach yields a result that is probably lesser than the fair market value of the business. In considering an asset-based approach, the valuation professional must consider whether the shareholder whose interest is being valued would have any authority to access the value of the assets directly. Shareholders own shares in a corporation, but not its assets, which are owned by the corporation. A controlling shareholder may have the authority to direct the corporation to sell all or part of the assets it owns and to distribute the proceeds to the shareholder(s). The non-controlling shareholder, however, lacks this authority and cannot access the value of the assets. As a result, the value of a corporation’s assets is rarely the most relevant indicator of value to a shareholder who cannot avail himself of that value. Adjusted net book value may be the most relevant standard of value where liquidation is imminent or ongoing; where a company earnings or cash flow are nominal, negative or worth less than its assets; or where net book value is standard in the industry in which the company operates. None of these situations applies to the Company which is the subject of this valuation report. However, the adjusted net book value may be used as a “sanity check” when compared to other methods of valuation, such as the income and market approaches.

The other category of unsystematic risk is referred to as “specific company risk.” Historically, no published data has been available to quantify specific company risks. However as of late 2006, new ground-breaking research has been able to quantify, or isolate, this risk for publicly-traded stocks through the use of Total Beta calculations. P. Butler and K. Pinkerton have outlined a procedure, known as the Butler Pinkerton Model (BPM), using a modified Capital Asset Pricing Model (CAPM) to calculate the company specific risk premium. The model uses an equality between the standard CAPM which relies on the total beta on one side of the equation; and the firm’s beta, size premium and company specific risk premium on the other. The equality is then solved for the company specific risk premium as the only unknown. The BPM is a relatively new concept and is gaining acceptance in the business valuation community. (BPM is a trademarked name for a model sold by a private for profit company. The model is a simplistic mathematical formula, easily replicated without the purchase of the model from the vendor. Therefore, attributing the model to BPM along with claims that BPM is “new ground breaking research” and “gaining acceptance” appears to be advertising hyperbole.)

It is important to understand why this capitalization rate for small, privately-held companies is significantly higher than the return that an investor might expect to receive from other common types of investments, such as money market accounts, mutual funds, or even real estate. Those investments involve substantially lower levels of risk than an investment in a closely-held company. Depository accounts are insured by the federal government (up to certain limits); mutual funds are composed of publicly-traded stocks, for which risk can be substantially minimized through portfolio diversification.

Closely-held companies, on the other hand, frequently fail for a variety of reasons too numerous to name. Examples of the risk can be witnessed in the storefronts on every Main Street in America. There are no federal guarantees. The risk of investing in a private company cannot be reduced through diversification, and most businesses do not own the type of hard assets that can ensure capital appreciation over time. This is why investors demand a much higher return on their investment in closely-held businesses; such investments are inherently much more risky. (This paragraph is biased, presuming that by the mere fact that a company is closely held, it is prone towards failure.)

We’ve all seen that with the crisis, one of the sectors that has been affected has been small businesses, in some cities, merchants accuse politicians of worsening the situation with their performances. The relationship between the city and the trade is not trivial, in this and subsequent articles I will try that relationship.

In this first article and by way of introduction, I will analyze the historical relationship between trade and development of cities. It is not conceivable without business city in fact is that business which allows the birth, growth and survival of the city.

All cities, with the possible exception of Roman settlements were for military or cities like Brasilia or even the nearest Madrid, who were born with a vocation to concentrate the administration of an existing state, have emerged over trade.

• A crossroads, served as meeting point, and an exchange occurred, it resulted in a market that was settled and resulted in the birth of a city.

• A sheltered place on the coast, led to a port, that port generated an exchange of raw materials and goods, a market, which resulted in a city.

• A strategic settlement in which stood a castle, created at his feet a turnover of tithes and taxes to the Lord, which resulted in a market, who settled and created city.

• A religious order that was set at a crossroads, and created a market for their own subsistence and development.

Create a small business is for many an irresistible challenge. The creation and implementation of own business can be tremendously rewarding in various ways: personal fulfillment, economic independence, a way of doing something important in life and even make a positive contribution to their community.

It is believed that 90% of all small business failures can be attributed to mismanagement, poor planning and lack of sufficient capitalization, but also considered other reasons such as poor location, excessive investment in fixed assets and lack of experience.

Many companies are set not by market research, but the temptation to create a revolutionary new concept, product or service and then try to find the market.

The choice of location for trade, for example, is governed by rules that are too simple. Unnecessary overhead will translate into higher prices for their customers, which will lead to lost sales. This, too, to keep the idea of simple solutions.

Some believe they can do and build businesses without being able to read a balance, how to analyze costs and prepare a business plan.

Entrepreneur quality can be described (rightly) as “fitness for purpose.” Read the rest of this entry »

People who want to have successful businesses must understand the need for patience, remember that old saying that Rome was not built in a day and therefore must acquire the “gift” to learn to do things at the right time and the right way.

The formulation of a strategy for planning and execution of all activities that leads you to success can make a big difference, for it also requires good time management.

If you usually are a patient person, you can make a realistic plan that is acceptable in terms of time, activities and objectives. Managing by objectives is often a great way to go getting the goals in a balanced manner as it may establish appropriate time frames for each target.

Remember to be patient is not synonymous with being weak, because the constant and intelligent work should always present in every activity that you perform and to be directed to the productivity of your business.

- Credit Rule

Giving credit means putting a part of your business in another person or client, it must take all necessary measures to avoid exceeding your capacity to give credit as well as the rules for granting, Ask for references of customers they are granting credit, question and investigate their ability to pay, payment policies, payment habits, in short, make sure the money from your sales reach safely to your business.

Be possible to design a credit agreement which stipulate the rules to your client the conditions under which they are granting credit. This part is usually delicate game that is the customer’s decision to accept your terms or to get another provider, you should be cautious for the management of this strategy, you could even set the amount of sales from which will have sign a contract.

Make an analysis of your finances to know exactly how many credits you can execute and establish the limit, once reached that limit does not need more loans since the financial solvency of your business could be compromised.

- Golden Rule

Always try to sell spot rigorous, this is the best collection strategy you can apply your first choice is the down payment, you can even encourage this rule by establishing some kind of discount or bonus to invite your client to pay you this way.

If a customer pays you cash and tries to keep it that way, sometimes make the mistake of offering credit to those who always pay cash, it can backfire because the client lost the habit of paying in cash and thereby causing a lack of fast cash input to the operation of your business. Once again I stress that these rules are part of a good sales strategy as it usually should be set from the first negotiation with your customer.

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