Normalization adjustments are essential in business valuations for SBA 7(a) loans, aligning historical financial performance with a hypothetical buyer’s expectations under the fair market value (FMV) standard. FMV, per IRS Revenue Ruling 59-60, is the price at which a property changes hands between a willing buyer and seller, neither under compulsion, with reasonable knowledge of … Continue reading Normalization Adjustments (Addbacks) in Business Valuations for SBA 7(a) Loans: Emphasis on Owner Compensation and Free Cash Flow
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Estimating the Cost of Equity Capital for Private Company Valuation
In valuing closely held businesses for SBA 7(a) financing, determining an appropriate cost of equity is a critical step in the income approach. This white paper explores the application of the build-up method using current Kroll data, historical returns by asset class, and empirical investor return expectations. Additionally, it addresses practical challenges and offers recommendations … Continue reading Estimating the Cost of Equity Capital for Private Company Valuation
Understanding Capital Structure’s Impact on Business Valuation: A Guide for Bankers
In business valuations—especially those conducted for SBA 7(a) loan purposes or during transactions—confusion often arises when changes in capital structure affect the valuation results. This confusion intensifies when a deal shifts from an asset purchase to a stock purchase. Bankers and clients may ask, “Why does the value change if the business hasn’t changed?” To … Continue reading Understanding Capital Structure’s Impact on Business Valuation: A Guide for Bankers
Understanding the Long-Term Growth Rate in Business Valuation – Limits, Logic, and Economic Reality
In business valuation, the income approach, particularly the discounted cash flow (DCF) method, often employs a two-stage model: a discrete forecast period and a terminal value assuming perpetual growth. The long-term growth rate (TGR) or terminal growth rate projects free cash flows (FCF) beyond the forecast period. While seemingly minor, TGR significantly impacts valuation. Unrealistically … Continue reading Understanding the Long-Term Growth Rate in Business Valuation – Limits, Logic, and Economic Reality
The Critical Role of Accurate Financial Information in Business Valuation
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
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.
Highland Global Business Valuations 