BVX Knowledge Base
BVX Knowledge Base
M&A University

Definitions of Price, Balance Sheet & Profit

Introduction

BVX®'s definition of these terms may differ from other methods of valuation. Hence, they need to be understood before reviewing BVX's valuations.

Price

Is BVX® value a Fair Market Value, a Fair Value, an Investment Value, or a transaction value at which all parties agree to the transaction?

Balance Sheet

Does the Operating Balance Sheet of the business, consist just of the Operating Assets and the Operating Liabilities?

Profit

Does BVX® endorse EBITDA as the sole measure of value, or does that value depends on many other variables?

This section defines what Price means, what items of actual Balance Sheet should be included and excluded, and what is meant by Profit. It is possible that BVX® definition of these terms may be different than other methods of valuation. Hence, details are provided here in order to help compare BVX® valuation with other methods. It is highly recommended to read these definitions and clarifications carefully to properly understand BVX® valuation. 

 

Through out this documentation, Purchase Price, Operating Value, Enterprise Value, Price and Value are used interchangeably to mean Enterprise Value.

 

BVX® defines Price as 100% Enterprise Value. Enterprise Value excludes non-operating assets and non-operating liabilities. See Price for more details.

 

Balance Sheet has a great impact on value. Inclusion of balance sheet in valuation is a new concept for most people because traditional methods do not emphasize it. BVX® requires input for the Operating Balance Sheet. No-operating assets and non-operating liabilities are excluded from Enterprise Valuation. For example, BVX® considers debt as a non-operating liability that should be excluded. See Balance Sheet for more details.

 

BVX® defines profit as EBITDA, which is Earnings Before Interest, Taxes, Depreciation and Amortization. One interpretation of EBITDA is that it is the amount of cash available for debt service, growth, taxes and dividends. See Profits for other meanings of EBITDA.

 

Note: BVX® uses EBITDA as the profit measure for valuation. This does not mean, however, that BVX® endorses EBITDA as the sole measure of value. On the contrary, the primary premise of BVX® is that value depends on many other Value Drivers. There is no single earnings measure or a simple cash flow measure that can be used to develop generalized price multiples.

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Definition: Price

Through out this documentation, Purchase Price, Operating Value, Enterprise Value, Price and Value are used interchangeably to mean Enterprise Value.

 

BVX® determines the operating value of the business, which is often called the "Enterprise Value" or the "Market Value of the Invested Capital (MVIC)". Enterprise value is a debt-free value. It excludes non-operating assets and non-operating liabilities. Enterprise value for an Asset purchase is usually different than the Enterprise value for a Stock purchase. "Equity Value" of the business is determined outside of the BVX®. It is equal to the enterprise value, plus non-operating assets, less non-operating liabilities and less existing debt excluded from BVX® valuation. (Note: Such equity value calculation assumes that the excluded existing debt, if to be assumed by the buyer, has the same amortization schedule as the one used in determining the enterprise value). 

 

Is BVX® value a Fair Market Value, or a Fair Value, or an Investment Value? BVX® does not have a firm position on this except that BVX® value can be any one of the above standards of value depending on the inputs and the purpose. For sure, BVX® valuation is a transaction value at which all parties to the transaction will be able to achieve their objectives.

 

BVX® valuation is called BVX® Best Value. It is the value for 100% interest of the business. This is the value that satisfies all the requirements of the multiple parties involved in the M&A transaction. For all practical purposes BVX® Best Value is the maximum Purchase Price that a willing and able Buyer will be able to pay for the business based on available financing, its terms, deal structure, and the operating assumptions.

 

BVX® value is the present value of the amount to be paid, either in cash or a combination of cash and future payments, to acquire the of the business. Buyer assumes no liabilities except normal levels of Operating Liabilities that do not create post-acquisition cash drain. Purchase Price is the sum of payments for all tangible assets, all intangible assets (brand value, goodwill, patents, customers, contracts, ordinary backlog, etc.), non-compete agreements, personal goodwill, extraordinary consulting/employment agreements, transition support, etc. (Note: Total Consideration paid for the business is the sum of Purchase Price plus the assumption of Operating Liabilities.)


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Definition: Balance Sheet

Unlike traditional methods, Balance Sheet has significant impact in BVX®. It is highly recommended that all users thoroughly review this section. 

 

BVX® valuation is based on buyer receiving the Operating Balance Sheet of the business, which consists of the Operating Assets and the Operating Liabilities and all the intangibles to sustain the business. Non-operating assets, non-operating liabilities, and debt are excluded.

 

The Buyer receives all Operating Assets, generally consisting of normal (sustainable) levels of operating cash, A/R, inventory, fixed assets (excluding real estate, see section 5.3), and pre-paid amounts; and the Buyer assumes Operating Liabilities, generally consisting of normal (sustainable) levels of trade Accounts Payable (A/P) and certain accrued expenses. (The Buyer generally does not assume tax related liabilities and accrued expenses that are not sustainable on an on going, weekly or monthly, basis. In many small transactions, the buyer does not assume any accrued expenses or A/P. An accountant and/or a financial advisor should be consulted to determine normal levels of operating cash, A/R, inventory, A/P and accrued expenses.) The Seller retains non-operating assets, non-operating liabilities, and all pre-acquisition "debt obligations". Debt obligations or any non-sustainable liability that will create post-acquisition cash drain to the Buyer, either through interest payments and/or principal payments, are excluded from BVX® valuation. Some of these are bank line of credit, term debt, shareholder loans, capital leases, preferred stock, etc. Liabilities associated with customer deposits, pre-paid subscriptions, customer advances, etc. can be assumed by the buyer provided specific assets of equal amount, to fulfill the obligations under such liabilities, are included on the asset side.

 

(Note: Buyer sometimes assumes certain debt and/or sustainable obligations. In this case, Purchase Price does not change. Instead, the net amount paid to the Seller is reduced by the assumed debt and/or non-sustainable obligations.)


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Definition: Profit

BVX® uses EBITDA as the profit measure. EBITDA is Earnings Before Interest, Taxes, Depreciation, and Amortization and before other non-cash expenses. BVX® uses EBITDA because it is a "more reliable" measure of cash profits. EBITDA is easy to calculate, it is independent of the existing debt structure, it is less dependent on the accounting methods, and it is less likely to get "manipulated" than other earnings measures. 

 

Note: BVX® uses EBITDA as the profit measure for valuation. This does not mean, however, that BVX® endorses EBITDA as the sole measure of value. On the contrary, the primary premise of BVX® is that value depends on many other  Value Drivers. There is no single earnings measure or a simple cash flow measure that can be used to develop generalized price multiples.

 

A proper interpretation of EBITDA is: "Sales minus all normal operating expenses except for expenses related to interest, taxes, depreciation, and amortization." Operating expenses must include, amongst many other things, fair salary and benefits for a manager to run the business. Operating expenses must also include a fair rent for the premises even if the building is owned by the business. (Note: Real Estate and Business are dissimilar assets because they have different ROI expectations. Hence, both should be valued separately. BVX® only values the Business without the Real Estate value. Real Estate value should be added to the Business value without Real Estate, to come up with the total value of the Business with the Real Estate.)

 

Another way to describe EBITDA is the amount available for no other payments than for debt service, growth capital, taxes and dividends. More specifically, EBITDA is the amount available for no other payments than interest, taxes, debt repayment, working capital, capital expenditures, non-compete payments, personal goodwill payments, excess employment/consulting payments, earn-out and dividends. 

 

EBITDA represents the "new profit" of the business and also represents the "new cash" generated by the business before debt service, growth capital, taxes and dividends. 


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