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Examining Three Common Approaches in Business Valuations 
By JoAnn Lombardi, PresidentVR Business Sales/Mergers & Acquisitions
When engaged in estimating the value of a private business interest, an appraiser considers the nature of the company and its industry, the availability of market data, the valuation’s purpose, the basis of value, and other relevant criteria. With this general information in mind, the appraiser typically turns to either one or a combination of three common appraisal approaches.
The Asset-Based Approach
The asset-based (or cost) approach derives an investment’s value by quantifying its replacement cost. In other words, a business is worth the combined value of its assets net of liabilities.
Courts praise the asset-based approach for its perceived simplicity and objectivity - especially for those companies that depend primarily on hard assets or asset-holding companies. The approach can take a couple of different forms, including:
The adjusted book value method. Under this variation, appraisers adjust balance sheet items (reported at book value) to their individual fair market values. Although off-balance-sheet assets and liabilities are typically considered, this method tends to downplay internally generated intangible assets (such as client lists, brands, and goodwill) and contingent items (such as pending litigation or insurance claims).
Additionally, appraisers may need to hire outside appraisers to estimate the value of assets outside their area of expertise, such as real estate or intellectual property. These experts add cost, and courts may question the objectivity of their conclusions.  
The excess earnings method. This technique derives intangible value from the capitalization of excess earnings and is popular in some jurisdictions for valuing small professional practices.  
The IRS created this method to compensate distilleries and breweries for value impaired during Prohibition. Thus, its inputs (such as tangible assets, income, and capitalization rates) aren’t well defined in the valuation literature. Accordingly, IRS Revenue Ruling 69-609 recommends that appraisers reserve this method for situations in which “no better method is available.”  
The Key to Capital
By Peter C. King, CEO VR Business Sales/Mergers & Acquisitions
Without capital-whether it’s profits from internal operations, a bank loan or equity financing-most businesses find it impossible to develop products, hire additional employees or invest in new equipment. As the old adage claims, you have to spend money to make money. But before you seek capital, it’s important to understand what qualities lenders and investors look for in a company, including key financial ratios. 
Capital Sources
There are three basic sources of capital for a business: internal operations, debt, and equity. Most companies prefer funds generated from internal operations or the net profit that results from subtracting expenses-including taxes, interest, and depreciation-from sales. This form of funding doesn’t involve obligations to anyone outside the company or increased outlays for interest payments or dividends. 
Unfortunately, most businesses don’t generate enough internally to pay for their growth. When increasing sales or cutting expenses isn’t enough, you must decide whether to borrow money or sell partial ownership in your company. Each method has advantages and disadvantages.
Debt vs. Equity Financing
Debt financing, or a loan, can be an expensive source of funds, but it allows your business to remain in the hands of existing shareholders. Most lenders are primarily interested in earning interest and receiving the balance according to the loan’s terms. As long as these conditions are met, lenders have little reason to exert control over your business. 
Your other option is equity financing, which means selling shares in your company to investors. These could be angel investors-individuals who invest directly in small businesses, often taking a mentoring role. Or they could be investment organizations such as private equity firms or venture capital funds. By selling shares in your company, you get the capital you need, but also surrender partial control of your business. And if you’re required to pay dividends to shareholders, that reduces the amount of capital left to grow your business.
What Kind of Owner Are You? How Does That Impact Your 
Transition Choices?
by Jeff Swiggett, CBI, M&AMI, Owner VR Business Brokers / Mergers & Acquisitions in New Haven, CT
Owners that are approaching a time when they wish to exit their business need to undertake a realistic appraisal of how ready they are financially and mentally. The options that are available to them depend upon the results from this assessment. Over the years, our firm has used a matrix to help define these options.
The axes of the matrix lead from low to high for mental and financial readiness. High financial readiness suggests the owner has created enough value and/or sufficiently saved funds for retirement so that after an exit they will achieve financial security. High mental readiness suggests that they are burned out or ready to enter retirement fully. Low financial and mental readiness is the exact opposite.
Where owners are on the matrix will dictate their exit options. For example, if they are neither mentally nor financially ready, and have a continued desire to grow the business, but are not well capitalized to do so, then they may want to consider taking on a partner to recapitalize it. Private Equity Groups are quite keen to do this. Alternatively, if owners are financially ready to exit but still wish to work, one option is to create a gradual exit by gifting the business to the next generation or selling to existing management over time. The worst position for an owner is to be mentally ready but unprepared financially.
Breaking Boundaries: The Exit Journey for Female Entrepreneurs
When Linda Etter and her husband, Tracy, decided they wanted to scale back from the long hours they were logging at their company, e&e IT Consulting Services, Inc., in 2014, they sold a majority stake in the staffing company, based in Mechanicsburg, Pa., to private equity firm IMB Partners, based in Bethesda, Md.
At the time, e&e IT Consulting had about $16 million in annual revenue. e&e’s business was heavily concentrated with the Pennsylvania state government, but IMB saw the potential to expand, according to Farrah Holder, managing director at IMB Partners. “Equity capital is going to be interested in the growth to come,” Holder says. 
Since then, e&e IT Consulting has grown to $22 million in annual revenue with an 18-person staff and a roster of 135 billable professionals. Under the leadership of the firm’s vice president Alecia Justice, the couple’s grown daughter, as part of its succession plan, the company is now on the hunt for acquisitions to fuel growth. To spark new business, IMB has connected e&e with other firms in its portfolio that need staffing services. That support, “has opened doors for us to additional business opportunities,” says Justice.
Female Representation in the Lower Middle Market
Scenarios like this are still relatively rare for female founders and CEOs, in part because women are underrepresented in the lower middle market and have been for many years. Only 4.2% of firms led by women have revenue of $1 million or more, according to American Express. “Baby Boomer exits are not as prevalent with women-owned businesses,” says Andrew Sherman, a partner in the Washington, D.C. office of law firm Seyfarth Shaw and author of Mergers & Acquisitions from A to Z.
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Denmark Topples Switzerland From Throne of World's Most Competitive Country
Source: Neue Zürcher Zeitung
In the annual ranking of the world's most competitive countries by the International Institute for Management Development (IMD), Denmark comes out on top for the first time. The deciding factors were entrepreneurial agility, digitalization, and sustainability.
Denmark is at the top for the first time
The top ten in the IMD World Competitiveness Ranking 2020 - 2022
An efficient and internationally well-connected economy, a well-functioning state of manageable size, and a white cross in the red field in the national flag: have been the hallmarks of the winner in the beauty contest for the most competitive country in the world for the last two years. The only thing that has changed is the shape of the flag: in 2022 it is no longer the square Helvetic flag, as it was last year, but the new rectangular Danish flag.
For 34 years, the renowned International Institute for Management Development (IMD), based in Lausanne and Singapore, has used extensive data sets and surveys to determine who deserves the crown in terms of economic competitiveness. Because the gross domestic product is considered too sweeping and simplistic a measure of performance, a whole series of criteria are applied in four areas. Aspects of the macroeconomic environment, the efficiency of state institutions, the corporate sector, and the quality of infrastructure are considered.
Small states are ahead
As the most digitally advanced country in the world, Denmark has reached the "top spot" with far-sighted strategies, a clear focus on social and environmental sustainability, an agile business sector, and the advantage of being a European country say a media release from the World Competitiveness Center at IMD. In the subcategories of entrepreneurial efficiency, productivity, and management quality, the country took the top spot in each case.
However, such rankings, as comprehensive as they may be, are always to be taken with a certain degree of caution. For example, the sixth place that the IMD determined for Switzerland in 2021 with regard to digital competitiveness is rather flattering when one thinks of the controversies surrounding fax communication during the Covid crisis. According to Christos Cabolis, chief economist at the World Competitiveness Centre, the handling of the Covid crisis by the countries studied is definitely an element of the assessment in terms of competitiveness.
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