Balance Sheet (Operating)
See Inputs for general instructions. It is highly recommended that the user understand this section thoroughly.
Most users are not accustomed to entering balance sheet data as part of the valuation because many traditional valuation methods ignore impact of the balance sheet on valuation (e.g. valuation based on P/E ratio, the capitalization approach, the terminal value calculation, etc.). However, the Balance Sheet plays a crucial role in BVX.
BVX provides accurate valuation for each business without directly knowing its industry. BVX achieves this by requiring inputs for business’s balance sheet and
how it can be financed. Supposedly the industry characteristics of a business are reflected in its balance sheet and the borrowing capacity of the assets in the
marketplace.
Balance sheet information helps calculate true cash flow to the investor. BVX uses Balance Sheet to calculate working capital requirements, to calculate bank
borrowing, to calculate depreciation, and to determine Goodwill.
BVX determines Enterprise Value of the business. Enterprise Value is often called Debt-Free Value or Market Value of Invested Capital (MVIC). It is based
on the “operating balance sheet” of the business. “Non-operating balance sheet” items are retained by the selling shareholders and are excluded from the Balance Sheet data input.
Equity Value of the business is the sum of the Enterprise Value determined by BVX and the non-operating balance sheet that is excluded in BVX valuation. The
non-operating balance sheet is equal to the actual balance sheet of the business less the Operating Balance Sheet entered in BVX.
non-operating balance sheet is equal to the actual balance sheet of the business less the Operating Balance Sheet entered in BVX.
• Do not enter the actual accounting balance sheet. Enter only the “operating balance sheet” and exclude “non-operating balance sheet” (see below).
• Recommendation: Enter all “operating balance sheet” items even if the buyer may not be buying them. This permits true calculation of the cash flow including working capital funding and depreciation.
• For most businesses “operating balance sheet” items are the assets and liabilities needed that generate the Adj. EBITDA. See individual balance sheet items for detail explanation.
• “Non-operating balance sheet” is the actual balance sheet minus the “operating balance sheet”. Examples of non-operating assets and liabilities are: Debt, revolver credit facility, leases, stretched A/P, excess cash, investments, non-essential inventory, non-operating assets, certain accrued expenses, etc. See Other Misc. Assets for goodwill and intangible assets.
• Buyer pays Enterprise Value and gets the “operating balance sheet”. However, actual transaction price can be higher or lower than the Enterprise
Value if specific “operating balance sheet” items are not part of the actual transaction.
• Recommendation: Enter all “operating balance sheet” items even if the buyer may not be buying them. This permits true calculation of the cash flow including working capital funding and depreciation.
• For most businesses “operating balance sheet” items are the assets and liabilities needed that generate the Adj. EBITDA. See individual balance sheet items for detail explanation.
• “Non-operating balance sheet” is the actual balance sheet minus the “operating balance sheet”. Examples of non-operating assets and liabilities are: Debt, revolver credit facility, leases, stretched A/P, excess cash, investments, non-essential inventory, non-operating assets, certain accrued expenses, etc. See Other Misc. Assets for goodwill and intangible assets.
• Buyer pays Enterprise Value and gets the “operating balance sheet”. However, actual transaction price can be higher or lower than the Enterprise
Value if specific “operating balance sheet” items are not part of the actual transaction.