Business valuation is a cornerstone of financial decision-making, particularly in transactions involving mergers, acquisitions, or financing, such as Small Business Administration (SBA) 7(a) loans for business acquisitions. Accurate financial information is the foundation of a credible valuation, ensuring that stakeholders—lenders, buyers, sellers, and appraisers—can make informed decisions. In scenarios where a division of a business … Continue reading The Critical Role of Accurate Financial Information in Business Valuation
Valuation Insights & Articles
Welcome to Valuation Insights & Articles, where Highland Global shares thought leadership, expert guidance, and commentary on the ever-evolving world of business valuation. Here, you’ll find practical insights tailored for SBA lenders, business owners, attorneys, and financial professionals. Topics include SBA 7(a) valuation standards, goodwill analysis, tax-related valuation, M&A strategy, litigation support, and valuation methodology best practices. Stay informed with clear, actionable content rooted in real-world experience and regulatory knowledge.
Asset Sale vs. Stock Sale: Legal, Tax, and Valuation Considerations in Small Business Acquisitions
Acquiring a business can be structured as an asset sale or a stock sale (or membership interest sale for LLCs). Both structures achieve ownership transfer but differ in legal mechanics, tax consequences, and valuation considerations. This white paper outlines these distinctions, details common inclusions and exclusions, and explains their treatment in business valuations, particularly for … Continue reading Asset Sale vs. Stock Sale: Legal, Tax, and Valuation Considerations in Small Business Acquisitions
EBITDA vs. Free Cash Flow: Why the Distinction Matters in SBA 7(a) Business Valuations
Accurate estimation of a company’s cash-generating ability is critical for SBA 7(a) business valuations. While EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) serves as a proxy for operating performance, it does not represent Free Cash Flow (FCF). Misinterpreting EBITDA as FCF can inflate valuations and misguide lending decisions. This white paper examines the differences … Continue reading EBITDA vs. Free Cash Flow: Why the Distinction Matters in SBA 7(a) Business Valuations
Tax Affecting Income in the Valuation of Pass-Through Entities for SBA 7(a) Business Valuations
One of the most debated topics in business valuation is whether to apply tax-affecting when valuing pass-through entities such as S-corporations, LLCs, or partnerships under the income approach. While these entities do not pay corporate-level income taxes, omitting tax-affecting entirely often leads to flawed and overstated valuations. This paper supports the reasoned use of tax-affecting … Continue reading Tax Affecting Income in the Valuation of Pass-Through Entities for SBA 7(a) Business Valuations
The Treatment of Unreported Cash in Business Valuations: Why It Cannot Be Included in Free Cash Flow
In business valuations—particularly for SBA 7(a) loan purposes—calculating free cash flow must be based on verifiable, legally reported financial data. A frequent misconception among small business owners is that a valuation should consider unreported (i.e., "off-the-books") cash receipts. However, incorporating unreported cash into a business valuation is improper, unethical, and legally indefensible. Not only would … Continue reading The Treatment of Unreported Cash in Business Valuations: Why It Cannot Be Included in Free Cash Flow
🚩 Red Flag Story: Working Capital Ignored
🔍 A buyer was acquiring a business for $1.2M. Everything looked clean—until we noticed the working capital wasn’t included. No cash. No receivables. No payables.Zero net working capital in the deal. The value dropped once we adjusted for what the buyer would actually receive. Lesson: consider the assets transferred, not just the income stream.
🧠 The Role of Working Capital in Valuation
💡 In SBA valuations, working capital can quietly make—or break—a deal. When calculating free cash flow and total value, we ask: ✔️ What working capital is actually being transferred?✔️ Will the buyer have enough to run the business Day 1?✔️ Is there a working capital deficit they’ll need to fund? Ignoring working capital? That’s like … Continue reading 🧠 The Role of Working Capital in Valuation
Understanding the Difference Between Weighted Average Cost of Capital and Cost of Equity Capital in Business Valuation
In the context of business valuation, particularly for closely held or small businesses, the Weighted Average Cost of Capital (WACC) and the Cost of Equity Capital (Ke) are fundamental elements of discounting future income streams. Although these two rates are often used interchangeably or confused in practice, they serve distinct purposes and reflect different risk … Continue reading Understanding the Difference Between Weighted Average Cost of Capital and Cost of Equity Capital in Business Valuation
🚩 Red Flag Story: Customer Concentration
🔎 One business had 74% of revenue from a single client. Everything else looked perfect—but this concentration was a massive risk. The client could: Leave Reprice Delay payment Sell to a competitor We applied a risk premium + valuation discount. Lender added contingencies. Deal still closed—with better protection. Buyers chase opportunity. Lenders must calculate risk.
🚩 Red Flag Story: Recurring CapEx Hidden as Repairs
🛠️ A business showed stable free cash flow—until we noticed recurring CapEx was buried in "repairs and maintenance." Turns out: $22K/year went to new equipment Another $14K for upgrades they made annually But none of it was treated as CapEx Once we corrected for true capital needs, cash flow dropped—and so did the value. Free … Continue reading 🚩 Red Flag Story: Recurring CapEx Hidden as Repairs
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