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CEPA Terms - Session 2: Questions & Detailed Answers
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CEPA Terms - Session 2: Questions & Detailed AnswersWhat is a Triggering Event? Right Ans - A Personal, Financial, Business
assessment correlated to the business Range Of Value.
What are benefits of a Triggering Event? Right Ans - •Establishes the
present & best in class business values
•Predicts the probability of succeeding with growth and transition strategies
•Identifies the PROFIT GAP
•Identifies the VALUE GAP
•Identifies ACTIONS needed to protect, build and harvest value
What is the equation behind Strategic (Present) Value = Simple Math Right
Ans - R/EBITTDA x Market Multiple = Value
or
R/Sales x Market Multiple = Value
What is a businesses Tax Number when it comes to valuation? Right Ans -
•This is the number that displays on the financial statements
• It is the number presented to tax authorities
•Usually, the objective is to minimize this number for tax purposes
•Assets are written down to book value
What is a business Real Number when it comes to valuation? Right Ans -
•This number is calculated by adjusting the financial statements; called
Financial Recasting
• It reflects the most likely earnings and balance sheet of an ongoing concern
• Tangible assets adjusted to market value upon transfer (NOTE: does not
include intangibles)
• The objective is to maximize this number for wealth creation
What does EBITDA stand for? Right Ans - EBITDA: Earnings Before Interest
Taxes Depreciation Amortization
What is Recasted EBITDA? Right Ans - Market's measure of earnings being
generated from ongoing, normalized operations. Needs to be normalized.
Balance Sheet adjustments may include inventory write offs, A/R write offs,
asset write offs, debt payoffs (inter-company or owner/employee).
, The Range of Value Market Multiple is determined by ______________. Right
Ans - The ROV multiple is determined by the Private Capital Market - you can't
control this.
What two factors determine where you land in the Range of Value? Right
Ans - Attractiveness and Readiness Scores, as well as Financial Benchmarking,
determines where you land in the ROV.
What is a businesses attractiveness score? Right Ans - How attractive the
business appears from a third-party point of view.
What is a businesses readiness score? Right Ans - How ready the owner
and the business are to transition and scale. It is not the decision to sell or
grow. It is a state of fact, not a state of mind.
What are common issues that hinder readiness ahead of a transition? Right
Ans - Personal, Financial, Valuation (buyer v. seller), Credibility of financial
information, Management/ key employee retention, Customer Concentration,
Power to Sell/ Offer Shopping, Deal Breakers
What is a business owner's Wealth Gap? Right Ans - Difference between
net worth (only excludes business value), and ideal wealth goal.
What is the rule of 4 when it comes to computing a business owner's ideal
wealth goal? Right Ans - We should assume 4% of wealth goal will suffice
annually until end of life.
What is the Profit Gap? Right Ans - Best In Class recasted EBITDA less
business present recasted EBITDA.
What is the Value Gap? Right Ans - Best In Class Strategic Value less
business present Strategic Value.
Remember: Strategic Value = Simple Math!
R/EBITDA x Multiple = Value
What is the definition of overall Business Value? Right Ans - The Economic
Benefit Stream of a Whole Business. Includes Tangibles and Intangibles (the 4
Cs).
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