Business Valuation and Market Dynamics Differences

Finally, when comparing big business valuation / Business Appraisals and small business valuations, the analyst should consider the differences in the quality and quantity of (1) the actual business valuation / Business Appraisal variables and (2) the market-derived data elements. Clearly, these factors will directly affect the business valuation methods selected, the business valuation / Business Appraisal procedures performed, the valuation analyses made, and the overall business valuation / Business Appraisal synthesis and conclusion.

Market-derived guideline public company pricing data and guide- line merged and acquired company pricing data are generally available and applicable for big businesses. In addition, subject company prospective financial information (i.e., accounting budgets, projections, or plans) and subject company prospective operational information (i.e., sales or production budgets, forecasts, and plans) are available for use in the business valuation / Business Appraisal of big busi- nesses in most cases. Also, the management of the big business gener- ally has access to a detailed listing of all owned assets (both tangible and intangible) and to estimates of individual asset values (i.e., through management experts, property tax renditions, insurance appraisals, or other prior asset appraisals).

 In contrast, the management of the typical small business often does not have access to accurate listings of all owned assets. This is because the small company's accounting systems may not be sufficient to collect these data, or it may be that manage- ment is familiar enough with the assets and their history that keeping a documented record is not cost-efficient. Likewise, small company man- agement probably will not have access to documented estimates of individual owned asset values. As explained above, the historical financial data are typically audited for most big businesses. However, historical financial statements may be compiled or even internally prepared in the case of many small businesses. The historical and prospective financial data and opera- tional data are usually adequate for the analyst's purpose in the valuation of a big business. In comparison, analysts must often work with less complete financial and operational information in preparing the valuation of a small business. Relevant industry information is also difficult for the management of small businesses to obtain and to provide to the analyst.

In big businesses, management typically has ready access to data on the subject company's competitive position and on the subject company's public competitors. But small business management may not readily have ac- curate data on the subject company's competitive position and may have no access to verifiable data on fhe subject company's small, private competitors. Typically, national and/or regional economic data are applicable to the business valuation / Business Appraisal of big businesses, and these data are readily available. However, the small business valuation / Business Appraisal generally involves the analysis of local economic data, and these data may not be readily available. Another difference in market economics i3 that big business man- agement generally can confer with outside company advisors, such as ac.cou-nfa-nfs, lawyers, and consultants_ Accordingly, these outside advisors may also be available to the analyst. On the other hand, small busi- ness management often does not have such ready access to professional advisors_ Accordingly, such professional advisors may not be available to the analyst during the business valuation / Business Appraisalof a small business.

 In addition, business valuation / Business Appraisal discounts, such as key person dependence, key customer dependence, key supplier dependence, lack of diversification with regard to products, lack of diversification with regard to location, obsolescence regarding plant, obsolescence regarding technology, and obsolescence regarding products, arc typically less applicable to the business valuation of many big businesses. However, the identification and quantification of these discounts is often quite relevant to—and is the most complicated aspect of—the business valuation / Business Appraisal of a small business.

Finally, the owners of a big business may have seriously considered the concept of an exit plan (i.e., a plan to liquidate their investment at sonic future time). At the very least, an exit (with or without a formal plan) is reasonably possible with regard to the typical big business However, in the case of small businesses, un owner exit plan is not likely to have been rigorously considered by the current equity owners. In addition, an exit plan is typically much more difficult to implement with regard to a small business.

 The operational, transactional, and market dynamics differences be tween big and small businesses may be second nature to experienced small business appraisers. However, these differences—and how they affect the business valuation / Business Appraisalprocess—may not be intuitively obvious to less experienced small business valuation / Business Appraisal practitioners. Nonetheless, these three categories of differences deserve serious consideration in the business valuation / Business Appraisal of all businesses but particularly in the business valuation / Business Appraisal of small, privately owned businesses. Clearly, these differences affect the avail- ability and the reliability of market-derived pricing data, the applicability of business valuation / Business Appraisal methods, the identification of business valuation / Business Appraisal discounts and premiums, the quantification of capitalization rates and pricing multiples, the consideration of transactional comparability, the analysis of a sale transaction's cash equivalency price, and ultimately, the estimation of the value of the privately owned business.

For these reasons, valuing small commercial businesses and small professional practices is often more professionally challenging than valuing larger businesses. This may seem counterintuitive because novice business valuation / Business Appraisalpractitioners often start their professional careers as- signed to the analysis and appraisal of such smaller businesses.