Software : Business : Finance : Business Valuation Model

Bizpep, Inc

The Business Valuation Model is software designed to provide an economical, efficient and effective business valuation. It combines relative indicators for future performance with basic financial data (Revenue, Variable and Fixed Costs) to value a business.

By uniquely applying your intuitive business and market knowledge a 3 year performance forecast with sensitivity analysis, investment return, and a business valuation is calculated. It is compact, easy to use, and requires minimal inputs.

Input should be based on your subjective views. These are translated into quantifiable values for model operation. There is no need to provide "perfect" answers. Use your industry knowledge to make informed estimates. The goal is to provide a streamline tool to indicate possible outcomes.

Outputs include a 3 year performance forecast with the ability to apply Sensitivity Analysis and produce Optimistic, Expected and Pessimistic forecasts. A Return on Investment and Business Valuation are provided for each forecast. Outputs are presented in tabular and graphical form.

This valuation method can be used for business purchase, sale, or establishment. Unlike many valuation methods The Business Valuation Model minimizes input requirements and focuses on determining the future value of any business. By building a forecast based on the internal and external factors affecting business performance it is possible to build investment return projections.

In reality a business is simply an investment medium and its value is determined by the future returns it offers. Being able to identify the factors that provide an opportunity to maximize these returns generates a solid base for both setting a valuation and developing plans to enhance business performance.

Existing and potential business owners who appreciate current business investment values can make informed decisions and maximize opportunities when they arise.

  1. Overview
  2. Instructions for Use
  3. Requirements for Use
  4. Registration
  5. Conditions of Use

Overview

The Business Valuation Model is designed to provide an economical, efficient and effective means to assess the value of a business. The forecast input should be based on your subjective views. These are translated into quantifiable values for model operation. There is no need to provide "perfect" answers. Use your industry knowledge to make informed estimates. The goal is to provide a streamline tool to indicate possible outcomes. A recent business taxation return will assist in determining values for the Performance section. The Business Valuation Model combines Relative Indicators for future performance with basic financial data (Revenue, Variable Costs, and Fixed Costs) to value the business. This valuation method can be used for business purchase, sale, or establishment. It is compact, easy to use, and requires minimal inputs. Outputs include a 3 Year Forecast, Sensitivity Analysis, Investment Return, and calculated Business Valuation in tabular and graphical form.

Instructions for Use

Specific item help is also provided within the software via hyperlinks to related help information.

Input

All input is on the Input and Analysis Sheets. Click the tab or hyperlinks to access. Blue cells allow input.

Current Operating Performance Data

This section reviews the current performance of your business for a full year period. It is designed to assess the level of expenses that vary with your sales (Variable Costs) and those that don't (Fixed Costs). It also allocates a realistic labor cost for the owners effort. The focus is on cash flow excluding assets and taxation. Broad expense categories are provided. Labels in blue cells can be adjusted however they should reflect the original label type to ensure formula are applied correctly. Values can be based on the previous years tax return adjusted for current trading. Inputs do not have to be perfect but should reasonably reflect business operation.

Business Name or Identifier

Input a name for the business. This appears as an identifier on the Output Sheets.

Business Revenue

Input the Revenue generated by the business for the current year.

Expenses

Select your Expense input as Monetary or Percent. This allows you to input your Expenses directly in Monetary (Dollars, Pounds etc) or Percentage terms.

Variable Costs

Variable Costs vary with the volume of product or service you provide. Only include these costs in this section and allocate them into one of the six categories.

Materials & Supplies
Input the annual variable expense for materials and supplies directly related to producing your product or providing your service.

Labor excluding Owner
Input the annual variable expense for labor (excluding the owner) directly related to producing your product or providing your service. Labor expenses should include all associated on-costs and benefits.

Labor Owner
Input the annual value of labor provided by the owner that is directly related to producing your product or providing your service. This variable expense should reflect the effective labor effort and can be estimated as the cost of an employee who could replace the owner. Labor expenses should include all associated on-costs and benefits.

Distribution
Input the annual variable expense for distribution of your product or service. This may include freight costs, packaging, and vehicle running costs.

Marketing
Input the annual variable expense for marketing. Include advertising, promotional publications, sponsorships, client functions, and any marketing or sales expense. Marketing is not essentially a variable expense, however it is assumed that marketing does influence the level of sales and a relationship exists between the level of marketing and the level of sales. It is on this basis that it forms a component of Variable Costs.

Other
Input any annual variable expenses not already accounted for.

Total Variable Costs
This is the sum of the variable expenses. It is expressed as a monetary value and as a percentage of revenue.

Fixed Costs

Fixed Costs are expenses which remain constant (up to a point) while the volume of sales vary. Only include these costs in this section and allocate them into one of the six categories.

Location
Input the annual fixed location expense. Include rent, power and light, maintenance, building insurance, security, and cleaning. If you own the property do not include purchase or finance costs.

Administration
Input the annual fixed administration expense. Include office phone, equipment costs, and stationary.

Labor excluding Owner
Input the annual fixed labor expense (excluding owner). This should include any labor expense not already accounted for in variable costs. Labor expenses should include all associated on-costs and benefits.

Labor Owner
Input the annual value of fixed cost labor provided by the owner. This should include the value of any labor which has not already been accounted for in variable costs. This fixed expense should reflect the effective labor effort and can be estimated as the cost of an employee who could replace the owner. Labor expenses should include all associated on-costs and benefits.

Interest Costs
Input the annual fixed Interest Cost. Include only the interest component of loan repayments. Principle components reflect assets. It is recommended that the business initially be valued with no Finance or Interest component i.e. 100% equity. This ensures the valuation provides the required return on the Total Investment. Once you have established valuation details you can then insert Finance details to determine the impact on the business.

Other
Input any annual fixed expenses not already accounted for.

Total Fixed Costs
This is the sum of the fixed expenses. It is expressed as a monetary value and as a percentage of revenue.

Operating Surplus
Operating Surplus reflects the before tax operating profit/loss of the business for the full years trading. It is calculated as the Revenue less Total Variable Costs less Total Fixed Costs. It excludes asset investment. Assets include property, equipment, and capital reinvestment in the business. These investment components are considered in the Investment section. The Operating Surplus represents the day to day (short term) business performance.

Owner Cash Flow
Owner Cash Flow is the Operating Surplus plus the value of any Labor provided by the Owner. If the owner provides no labor for the business Owner Cash flow and Operating Surplus will be equal.

Forecast Data

This section considers factors that influence future business performance. A relative indicator is used to reflect unit changes in these factors. The base year relative indicator for each factor is defined as 100%. Relative indicators for each of the next three years are applied to reflect likely changes in the unit cost or strength of the factor. Each indicator is relative to the prior year. A 10% increase from the previous year is reflected by a relative indicator of 110%. A 10% decrease from the previous year is reflected by a relative indicator of 90%. Relative indicators for costs reflect changes in the base unit of the expense such as labor costs per hour or material costs per unit.

Relative Indicator

Relative Indicators are required for each factor for Years 1 to 3. If there is no change from the previous year the Relative Indicator is 100%. You have provided Revenue and Costs details for the current Year. Year 1 is the year following the Current Year, Year 2 follows Year 1, and Year 3 follows Year 2.

Level of Competition
Input the percentage relative indicator to reflect the level of change from the previous year. Consider the number of competitors, competitor strategies, potential new entrants. This indicator has an inverse relationship to forecast Business Revenue. All things being equal as the level of competition increases Business Revenue decreases.

Market Strength
Input the percentage relative indicator to reflect the level of change from the previous year. Consider market growth, technology & regulatory impacts and customer needs. Market strength is an indicator of the demand for the type of product or service you provide. This indicator has a direct relationship to forecast Business Revenue. All things being equal as market strength increases Business Revenue increases.

Materials & Supplies Costs
Input the percentage relative indicator to reflect the level of change from the previous year. Consider the potential changes in supplier pricing, sources of supply, your bargaining power, demand for materials, and possible alternative materials. This indicator has a direct relationship to forecast Materials & Supplies expenses. All things being equal as the unit cost of materials and supplies increases this Variable Cost expense increases.

Labor Costs
Input the percentage relative indicator to reflect the level of change from the previous year. Consider market forces and availability of skilled staff. This indicator has a direct relationship to forecast Variable and Fixed Cost Labor excluding Owner, and Labor Owner expenses. All things being equal as the unit labor costs increase these labor expenses increase. It is also used to determine future Owners External Earning Power.

Interest Rates
Input the percentage relative indicator to reflect the level of change from the previous year. This is percentage change not actual values. For a current interest rate of 6% a relative indicator of 110% in Year 1 equates to 6.6%, a relative indicator of 110% in Year 2 takes this to 7.26%. This indicator has a direct relationship to forecast Interest expenses. All things being equal as interest rates increase this Variable Cost expense increases.

Business Market Position
Input the percentage relative indicator to reflect the level of change from the previous year. Consider your position in the market, and the impact of your current actions. This is a measure of your standing relative to the competition as perceived by potential consumers. If things will remain much the same input 100%, indicating no change over the previous year. If you have actions to improve the position of your business by 10% then the input would be 110%. This indicator has a direct relationship to forecast Business Revenue. All thing being equal as market position increases Business Revenue increases. Actions contributing to the business position must be substantiated and implemented to have an impact.

Variable Costs Efficiency
Input the percentage relative indicator to reflect the level of change from the previous year. This should reflect changes in the relationship between your Variable Costs and revenue. If you have actions to improve your Variable Costs efficiency (decrease variable costs) by 10% over the previous year input 110%. Consider changes in processes, distribution or the materials used. This indicator has an inverse relationship to forecast Variable Costs Materials & Supplies, Labor excluding Owner, Labor Owner, Distribution, Marketing and Other expenses. All things being equal as Variable Costs Efficiency increases less materials, labor, distribution and marketing resources are required resulting in a decrease in these expenses. Actions must be substantiated and implemented to have an impact.

Fixed Costs Efficiency
Input the percentage relative indicator to reflect the level of change from the previous year. Consider changes in administration processes and Fixed Cost labor requirements. This indicator has an inverse relationship to forecast Fixed Costs Administration, Labor excluding Owner, Labor Owner, and Other expenses. All things being equal as Fixed Costs efficiency increases less administration and labor resources are required resulting in a decrease in these expenses. It does not apply to Location and Finance expenses. Actions contributing to the business position must be substantiated and implemented to have an impact. You can use the Decision Assistant Model to value your actions and determine their business impact, this is available from the bizpeponline.com web site.

Fixed Costs Flow-on
Input the percentage Fixed Costs Flow-on. This indicates the estimated level of fixed costs adjustment to support revenue variations. Fixed Costs are generally considered a constant expense, however large sustained revenue variations place pressure on fixed costs and usually result in an increased fixed cost expense. This may include larger floor area, more administration costs, or higher financing. The Fixed Costs Flow-on percentage is the amount of increase in Fixed Costs expense for a 100% increase in revenue. An fixed costs flow-on of 20% reflects a 20% increase in Fixed Costs expense for every 100% increase in revenue. This indicator has a direct relationship to all forecast Fixed Cost expenses.

Valuation Data

This section provides data to value the business. Consideration is given to the owners earning power outside the business, the replacement value of business assets and their useful life. Property (Real Estate) valuations are considered constant throughout the period. Annual replacement costs for other business assets are calculated as the Replacement Value divided by the Asset Life. This provides for constant reinvestment to maintain the business. This data is combined with the business forecast to determine a business valuation.

Owners Time Commitment to Business
Input the percentage of work time the owner commits to the business. This is used to determine the owners return for effort and indicates the available amount of owner resource. Available resource will be applied to any forecast labor increase in Fixed, then Variable Costs where the owner currently contributes.

Owners External Earning Power
Input the annual income the owner could earn if employed outside the business. Include any benefits. The actual return from the business must compensate the owner for giving up External Earnings and provide the required return on Investment. A return on Investment only occurs after the owner has been compensated for External Earnings given up.

Replacement Value of Business Assets
Input the replacement value of physical business assets. Exclude property. Consider vehicles, plant and equipment. This forms a component of the total business investment.

Life of Assets (years)
Input the average life of the assets. The Replacement Value of Business Assets will be divided by the Life of Assets to provide an indication of annual asset depreciation expense. This will be used in determining the owners return from the business.

Market Value of Property
Input the estimated market value of property owned by the business. Property values are considered stable over the forecast period and no depreciation is allowed for. This forms a component of the total business investment.

Other Investment in Business
Input the value of any other investment made in the business. Consider operating capital and goodwill paid. This forms a component of the total business investment. This amount will be adjusted in-line with your Valuation Analysis.

Total Investment
This indicates the Total Investment in the business. It is the sum of Replacement Value of Business Assets, Market Value of Property, and Other Investment in Business.

Financed Amount
This is the amount of finance carried by the business. It is recommended that the business initially be valued with no Finance or Interest component i.e. 100% equity. This ensures the valuation provides the required return on the Total Investment. Once you have established a valuation you can then insert Finance details to determine the impact on the business. The calculated Interest Rate is based on the Financed Amount and the annual Interest Cost from the Performance Data. No principle reduction is considered during the forecast period, only interest expense, principle components reflect assets.

Equity Investment
This is the average annual Return on Total Investment over a three year period.

Sensitivity Analysis

Sensitivity Analysis allows you to adjust your Relative Indicators by a set percentage to generate Optimistic and Pessimistic Forecasts.

Optimistic Input
Input the percentage improvement in Relative Indicators to generate an Optimistic Forecast. If you feel it is "reasonably likely" your Relative Indicators are 20% too low, input 20%.

Pessimistic Input
Input the percentage degrade in Relative Indicators to generate a Pessimistic Forecast. If you feel it is "reasonably likely" your Relative Indicators are 20% too high, input 20%.

Business Revenue
This is the forecast revenue generated by the business.

Optimistic
This is the forecast based on your Optimistic improvement to Relative Indicators.

Expected
This is the forecast based on the Relative Indicators you provided as input.

Pessimistic
This is the forecast based on your Pessimistic degradation of Relative Indicators.

Operating Surplus
This is the Revenue less Variable and Fixed Costs including payment to the owner for labor provided.

Owner Cash Flow
This is the Operating Surplus plus any labor Earnings of the Owner.

Business Return
Business Return is the Owners Cash Flow less a Depreciation Allowance and Owners External Earning Power. A Depreciation Allowance is required for the long term maintenance of the business. It is calculated as the Replacement Value of Business Assets divided by the Asset Lifetime. If the Depreciation Allowance is not reinvested business performance and value will decrease. The Owners External Earning Power reflects the income given up by the owner to work in the business. This must be recouped through the business before there is any return on investment generated.

Valuation Analysis

Simply input your desired Return on Investment to calculate your Business Valuation. If you have applied Sensitivity Analysis 3 valuations will be calculated; Optimistic, Expected, and Pessimistic.

% Return on Total Investment
This is the Business Return as a percentage of the Total Investment. It is an indicator of the quality of the business investment. The higher the Return on Investment the better the investment. However as the level of risk increases a higher Return on Investment is required to compensate for the risk taken. Business Return is the Owners Cash Flow less a Depreciation Allowance and Owners External Earning Power.

Required Return on Investment
This is the Business Return as a percentage of the Total Investment. It is an indicator of the quality of the business investment. The higher the Return on Investment the better the investment. However as the level of risk increases a higher Return on Investment is required to compensate for the risk taken. Business Return is the Owners Cash Flow less a Depreciation Allowance and Owners External Earning Power.

Expected Valuation
This Valuation is based on the Expected Forecast and the required average 3 Year Return on Investment. It represents the Total Investment in the business and is an indication of Sale or Purchase price. Based on the Expected Forecast this is the maximum Investment that should be applied to this business to achieve the required Return on Investment.

Optimistic Valuation
This represents the Optimistic Valuation (high). It provides the required average 3 Year Return based on the Optimistic Forecast. However if the business does not provide a return inline with the Optimistic forecast the return on Investment will be less than required at this valuation.

Pessimistic Valuation
This represents the Pessimistic Valuation (low). It provides the required average 3 Year Return based on the Pessimistic Forecast. If the business provides a return greater than the Pessimistic forecast the return on Investment will exceed that required at this valuation.

Update Valuation
Input your Valuation and click the Update Button to generate new Return details. The Valuation will normally be the Expected Return Valuation.

Output Sheets

Summary outputs are included on the Sensitivity and Valuation Analysis Sheets. Details are in tabular form on the Results Sheets and graphical form on the Chart Sheets. To display Sheets click the associated button or tab.

Sensitivity Analysis

Sensitivity Analysis allows you to adjust your Relative Indicators by a set percentage to generate Optimistic and Pessimistic Forecasts.

Valuation Analysis

Simply input your desired Return on Investment to calculate your Business Valuation. If you have applied Sensitivity Analysis 3 valuations will be calculated; Optimistic, Expected, and Pessimistic.

Expected Results

Full tabular results for your Expected Forecast and Return on Investment.

Optimistic Results

Full tabular results for your Optimistic Forecast and Return on Investment.

Pessimistic Results

Full tabular results for your Pessimistic Forecast and Return on Investment.

Forecast Revenue Chart

3 Year Forecast Revenue Chart; Optimistic, Expected and Pessimistic.

Forecast Return Chart

3 Year Forecast Return Chart; Optimistic, Expected and Pessimistic. Return is the Owners Cash Flow less the Depreciation Allowance and Owners External Earning Power.

Operating Surplus Chart

3 Year Expected Operating Surplus Chart including Variable and Fixed Costs.

Surplus & Return Chart

3 Year Expected Operating Surplus on Sales, Return on Sales, and Return on Total Investment percentages.

Requirements for Use

This software is in Microsoft Excel format. To run this software you must have Excel installed on your computer and macros must be enabled.

If your downloaded software is a Compressed zip file (with a .zip extension) it will require unzipping for use. Trial Zip software is available free from Winzip.

Registration

If you find this software useful or maintain it beyond the evaluation period payment is required. If payment is not provided all software must be deleted. Secure online payment is available below.

Upon receipt of payment Bizpep will provide by return email registration code to fully enable evaluation software. Registering software removes restrictions on Print and Save functions. All other features including cell and macro protection are the same in evaluation and registered software. All non-input cells and macros remain protected to ensure the integrity of the formula and programming. When you have your registration code click the Registration Button on the Welcome, Terms and Conditions or Thank You sheet and follow the prompts.

The number of licenses you purchase is the maximum Number of Users and the maximum Number of Computer Systems the purchased software can be installed on or that can access the software if on a network. If you purchase a single user license (Quantity set to 1) the software must only be accessible from one computer and there must only be one user. To run the software on more than one computer, a network, or provide for additional users you must purchase a Multi-user license by setting the purchase quantity to the required number of user licenses. Multi-user licenses attract a 30% discount.

Non-Commercial License
This license is for non-commercial private and internal business use only. It does not cover the commercial use of software for inter-business support, advice, or consulting. Registering software removes any restrictions on Print and Save functions. All other features including cell and macro protection are the same in evaluation and registered Non-Commercial software. All non-input cells and macros remain protected to ensure the integrity of the formula and programming.

Commercial License
This license allows the commercial use of software for inter-business support, advice, or consulting. Registering evaluation software with a Commercial License removes any restrictions on Print and Save functions and provides authorization for Commercial use. For some software titles you can also receive upon request a Registered Commercial software version allowing you to view the formula applied to enhance your knowledge of software operation. Registered Commercial software will be emailed within 48 hours of request receipt and only when a Commercial License has been purchased.

In all titles macros remain protected.

Conditions of Use

The specific suitability of this software must be independently assessed. Software is provided as is, use is entirely at the users risk, and use acknowledges that Bizpep and all associated parties are held harmless from any claims or losses relating to software provided.

Bizpep retain all intellectual property rights. It is prohibited to use the software, concepts, formats, and systems obtained from Bizpep in any manner outside their intended use as designed and defined by Bizpep. You may not modify, translate, reverse engineer, decompile, disassemble or create derivative works based on Bizpep software, services or concepts.

You may not sell or require payment in any form for Bizpep software.

Example of Pessimistic Business Valuation Model


Pessimistic Results - Business Valuation Model Excel 32
Pessimistic Forecast degraded by 20%
My Business
Current Year Year 1 Year 2 Year 3 3 Year Average
Business Revenue 500 000 542 085 563 768 598 858 568 237
Expenses
Variable Costs
Materials & Supplies 10 000 11 117 11 673 12 399 11 730
% Revenue 2,0% 2,1% 2,1% 2,1% 2,1%
Labor excluding Owner 200 000 214 900 222 880 254 717 230 832
% Revenue 40,0% 39,6% 39,5% 42,5% 40,6%
Labor Owner 50 000 49 790 51 339 54 047 51 725
% Revenue 10,0% 9,2% 9,1% 9,0% 9,1%
Distribution 20 000 21 175 21 175 22 493 21 615
% Revenue 4,0% 3,9% 3,8% 3,8% 3,8%
Marketing 10 000 10 588 10 588 11 247 10 807
% Revenue 2,0% 2,0% 1,9% 1,9% 1,9%
Other 20 000 21 175 21 175 22 493 21 615
% Revenue 4,0% 3,9% 3,8% 3,8% 3,8%
Total Variable Costs 310 000 328 745 338 830 377 396 348 323
Total Variable Costs % 62,0% 60,6% 60,1% 63,0% 61,3%
Gross Profit 190 000 213 340 224 939 221 462 219 914
Gross Profit % 38,0% 39,4% 39,9% 37,0% 38,7%
Mark-up Equivalent 61,3% 64,9% 66,4% 58,7% 63,1%
Fixed Costs
Location 40 000 40 842 41 275 41 977 41 365
% Revenue 8,0% 7,5% 7,3% 7,0% 7,3%
Administration 30 000 30 631 30 469 29 795 30 299
% Revenue 6,0% 5,7% 5,4% 5,0% 5,3%
Labor excluding Owner 50 000 51 052 52 305 54 217 52 525
% Revenue 10,0% 9,4% 9,3% 9,1% 9,2%
Labor Owner 10 000 10 210 10 461 10 843 10 505
% Revenue 2,0% 1,9% 1,9% 1,8% 1,8%
Interest Costs 0 0 0 0 0
% Revenue 0,0% 0,0% 0,0% 0,0% 0,0%
Other 0 0 0 0 0
% Revenue 0,0% 0,0% 0,0% 0,0% 0,0%
Total Fixed Costs 130 000 132 736 134 511 136 833 134 693
Total Fixed Costs % 26,0% 24,5% 23,9% 22,8% 23,7%
Total Expenses 440 000 461 480 473 340 514 229 483 017
Operating Surplus 60 000 80 605 90 428 84 629 85 220
Operating Surplus % 12,0% 14,9% 16,0% 14,1% 15,0%
Owner Cash Flow 120 000 140 605 152 228 149 519 147 450
Owner Cash Flow % 24,0% 25,9% 27,0% 25,0% 25,9%
LESS
Depreciation Allowance 12 500 12 763 12 899 13 118 12 926
Owners External Earning Power 60 000 60 000 62 160 65 890 62 683
Business Return 47 500 67 842 77 170 70 511 71 841
Return on Sales 9,5% 12,5% 13,7% 11,8% 12,6%
Total Investment 290 023
Return on Total Investment 16,4% 23,4% 26,6% 24,3% 24,8%
 

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