BSBR Educational Resources

Business Valuation

Capitalization of Earnings

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Capitalization of Earnings

Dictionary Definition

This method is used to value a business based on the future estimated benefits, normally using some measure of earnings or cash flows to be generated by the company. These estimated future benefits are then capitalized using an appropriate capitalization rate. This method assumes all of the assets, both tangible and intangible, are indistinguishable parts of the business and does not attempt to separate their values. In other words, the critical…

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What is Beta?

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Beta

Dictionary Definition

Beta is a factor used to measure systematic risk. Systematic risk is the uncertainty of future returns owing to the sensitivity of the return on the subject investment to movements in the returns for a composite measure of marketable investments.


Plain English

Beta refers to the volatility or riskiness of a stock relative to all other stocks in the market.


Why it Matters to You

This is used in calculating the WACC.  Generally, we are using public company beta…

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What is the Equity Risk Premium?

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Equity Risk Premium...AKA ERP

Dictionary Definition

Equity Risk Premium (ERP) is defined as the extra yield that can be earned over the risk-free rate by investing in the stock market. 


Plain English

The equity risk premium is based on the idea of the risk-reward tradeoff. As a forward-looking quantity, the equity-risk premium is theoretical and cannot be known precisely, since no one knows how a particular stock, a basket of stocks or the stock market as a whole will perform in the future…

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What is the Risk Free Rate?

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Risk Free Rate

Dictionary Definition

The risk free rate is the return that can be earned by investing in a riskless security, e.g., U.S. Treasury bonds.


Plain English

The risk free interest rate is the rate of return of a hypothetical investment with no risk of financial loss, over a given period of time.

The 20 year treasury yield curve rate is the most widely used metric for the risk-free rate.  


Why it Matters to You

This is used in calculating the WACC.  

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What is Weighted Average Cost of Capital?

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Weight Average Cost of Capital...AKA WACC

Dictionary Definition

A firm’s Weighted Average Cost of Capital (WACC) represents its blended cost of capital across all sources, including common shares, preferred shares, and debt.  The cost of each type of capital is weighted by its percentage of total capital and they are added together.

The purpose of WACC is to determine the cost of each part of the company’s capital structure based on the proportion of equity, debt, and preferred stock it has. …

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What is S,G,&A?

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Selling & General Administrative Operating Expenses...AKA S,G&A


Dictionary Definition

The major non-production cost presented in an income statement (statement of profit or loss).


Plain English

All of the expenses on the profit and loss statement that are not directly tied to the cost of creating the product or service.

 

Why it Matters to You

Business owners need to be aware that the SG&A is a potential topic of conversation for a buyer who wants to purchase your company and has dupl…

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What is the Altman zScore?

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Altman zScore

Dictionary Definition

The Altman Z-Score is the output of a credit-strength test that helps gauge the likelihood of bankruptcy for a publicly traded company.  The Z-score is based on five key financial ratios that can be found and calculated from a company’s annual 10K report. 


Plain English

This is a score that gauges the likelihood that a company is headed for bankruptcy.


Why it Matters to You

This is a good metric for any company to review.  Should the company fall in…

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Basics of Business Valuation

I had the pleasure to be a guest host on a Searchfunder live stream!  The original plan was to go through my slides in 45 minutes and take questions for the rest of the hour.  But...I can talk all day about business valuations and I think I took up just about the whole hour!!  Thank you Searchfunder for having me on your live stream, I can't wait for the next one!

Here is what we cover in this livestream:

  • Normalizing the Financials
  • Industry Review
  • Benchmarking
  • Comps Analysis
  • Fair Market …

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Bankruptcy Indicator, Possible Prevention

Copy of Death case study (2)

A few years ago I worked with a client who owned an appliance store that was doing about $10M in annual revenue.  The business focused on large household appliances, mainly high end kitchen appliances.  They had an amazing showroom and took care of clients from sales and ordering through delivery and installation.  This family-owned and operated business had been serving its community since 1970.  The owner approached Blue Sky for help with a possible sale of the business.  She was entering reti…

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What is a Business & Market Strategy Guide?

Business & Market Strategy Guide

Business & Market Strategy Guide...AKA B&MSG

Dictionary Definition

IRS Revenue Ruling 59-60 determines the basis of fair market value. It states that fair market value is, "The amount at which the property would change hands between a willing buyer and willing seller when the former is not under any compulsion to buy, and the latter is not under any compulsion to sell, both parties having a reasonable knowledge of relevant facts."


Plain English

A calculation estimating how much money someo…

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