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
business valuation explained
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
đźš© 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
đź’ˇ 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
đźš© 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.
đźš© 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 đźš© Red Flag Story: Recurring CapEx Hidden as Repairs
🧠Valuation vs. Loan Amount
đź’˛ Quick reminder: A business’s value isn’t the same as what it can support in loan terms. ⚠️ We’ve seen deals where: FMV = $1.6M But loan ask = $2.1M Why? Personal goodwill, buyer synergy, optimism Appraisers calculate value. Underwriters assess risk. Those aren’t always aligned. đź“Ś The loan amount must fit within what the … Continue reading 🧠Valuation vs. Loan Amount
Treatment of Rent in Business Valuations for SBA 7(a) Loans
In SBA 7(a) business acquisition transactions involving both a business and its real estate, distinguishing between the business enterprise and real property valuations is critical. This white paper addresses the misconception that rent can be excluded from business valuation cash flows when real estate is purchased or owned by the company, a practice that conflicts … Continue reading Treatment of Rent in Business Valuations for SBA 7(a) Loans
Price vs. Value: Why They Are Not the Same in Business Valuation
In business acquisitions, "price" and "value" are often conflated, creating confusion among stakeholders. For SBA 7(a) lending, distinguishing fair market value (FMV) from the negotiated transaction price is critical to ensure compliant financing and informed decisions. This white paper explores the differences, their causes, and their implications for objective SBA 7(a) valuations. Defining the Terms … Continue reading Price vs. Value: Why They Are Not the Same in Business Valuation
Highland Global Business Valuations 