Special dividends, to the extent that your company has excess assets, can enhance personal liquidity and diversification. They can help increase ongoing shareholder returns. I have always been against retaining significant excess assets on company balance sheets because of their negative effect on shareholder returns and their adverse psychological impact. It is too easy for management to get “comfortable” with a bloated balance sheet. We explore the decision of special dividends and their effects through a short anecdote.

With the backdrop of normalizing adjustments related to non-recurring and discretionary items, we continue our discussion on normalizing adjustments. There are other types of normalizing adjustments that occur because of the relationship between the balance sheet and the income statement, and the process of normalizing a company’s balance sheet may give rise to additional normalizing adjustment for the income statement. In this post we address additional questions and issues about normalizing adjustments and then discuss balance sheet adjustments.

In this post, we talk about normalizing adjustments to the income statements of private companies. However, we cannot talk about normalizing adjustments for the income statement outside the context of adjustments to the balance sheet. As we will see, there are many things that can happen in a given year that might distort the pattern of earnings from the viewpoint of valuation or from the perspective of market participants. The purpose of normalizing adjustments is to show what earnings would be on a, well, normal basis. We discuss non-recurring items both those that will decrease normalized earnings as well as those that will increase earnings as well as discretionary items.

Technically, there are three valuation approaches, the income approach, the market approach, and the asset approach. Within approaches, there are valuation methods. For example, the single period income capitalization method is a method within the income approach. Finally, there are techniques within methods. The single period income capitalization of net income or net cash flow is one such technique. This post introduces a single period income capitalization technique to capitalize EBITDA. It should be of interest to business owners, business appraisers and market participants.

Considering the foundation we have built in the last few posts, we can now, using the total capital version of the Gordon Model, build capitalization rates and multiples for EBIT and EBITDA. We discuss the various assumptions or calculations, which are found on the numbered rows in our example table.

Many market participants and business appraisers refer to EBITDA as one measure of gross cash flow. Some business owners think about the value of their businesses in terms of rule of thumb multiples of EBITDA, say 4x to 6x, or 5x to 7x, or whatever, depending on the industry. However, Warren Buffet warns against “trumpeting EBITDA” as a “pernicious practice.” In light of both sides, we consider whether it can valuable to look at EBITDA in the context of two different public companies: Exxon and Apple. We introduce what may be a new concept in the EBITDA Depreciation Factor.

In this post we will discuss four important and interrelated concepts of value. We have talked about Market Value of Total Capital and Market Value of Equity in previous posts. It is now time to develop a clear understanding of what each of these terms means. We will also introduce a new term, Enterprise Value. We will also distinguish between the Market Value of Equity on an operating basis and the total value of equity of a business.

Businesses are financed with debt, equity and sometimes, preferred stock. We will not consider preferred stock in this discussion, because few private companies have it. The discount rate for developing MVTC, or Market Value of Total Capital, is called the Weighted Average Cost of Capital (WACC). In this post, we will discuss the concept of the WACC and its use as an investment tool, illustrate how to develop it, and then show how it can be used to develop indications of MVTC.

A discount rate is a rate that is used to discount, i.e., to convert, expected future benefits into present value. The idea of present value is fairly intuitive: A dollar received today is worth more than a dollar to be received in a month or a year. Business appraisers “build” discount rates using a concept known as the Capital Asset Pricing Model (CAPM). We walk through its components using a risk-free rate as a foundation and adding premiums. Using our assumptions, we can then build-up a discount rate.

After looking at the Gordon Model (and the DCF model) and understanding indications of the equity value of a business, we look at levels of earnings on an income statement. We consider how they relate to one another as well as how they convert to indications of value. Understanding the differences is critical so that we apply the right multiples to the appropriate and corresponding measures of earnings.