Business Valuation Blog

Gift Card Liabilities When Valuing a Business

Recently, a lender (who now has become a client) came to us looking for a second opinion on a valuation of a Massage Envy Franchise. Their appraiser came back with a negative value conclusion which centered around deferred gift card liabilities transferring with the sale. We took a step-by-step review of the business and how these liabilities are treated when determining the value of the franchise. Here are some key points from that discussion.

A deferred liability occurs when a company has been paid for a service that a customer has not yet received or that has not been fully completed. This can happen in any industry, but this is common among businesses that sell gift cards.

Here’s an example:

A local massage franchise sells a $100 gift card to a customer for a 1-hour massage. That service (and revenue) is booked at full cost at the time the gift card was sold, but the company is sold before it’s redeemed. Even though the prior owner received payment, the new owner is still obligated to provide that service. This is considered a deferred liability on the balance sheet for $100.  

From a valuation perspective, it may not be a true liability because other costs are associated with providing the massage. Some gift cards are never redeemed, but regardless of whether they are or not, the store is still open, the massage technicians are still being paid, and the lights are still on, so operational expenses are still being incurred. Redeeming the gift card just requires a slot to be open during any day in the future so that $100 liability is actually much less. In the case of Massage Envy, they have specific formulas for normalizing the gift card liability.

When comparing market transactions from similar massage franchises, these “gift card liabilities” are built into the price. Both buyer and seller understand that they are there, and

assuming they are “normal,” they are included. Therefore, there should not be a deduction for the market approach. 

For an income approach, you can take two routes:

  1. Use a deduction but come up with a “reasonable” liability to deduct. 
  2. Build your liability into your cash flow projection and DCF.

How To Accurately Determine Liability

To value these businesses appropriately, you have to know how to treat the gift cards and the liabilities that transfer with them to a new owner. If you have questions about properly determining what a gift card liability is actually worth, the experts at GCF can help.

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GCF Business Valuation Celebrates Small Businesses

Earlier this month, our team celebrated National Small Business Week. This past year has been a turbulent time for business owners and the SBA lending community, and we are proud to be part of a resilient community. 

Usually, National Small Business Week is hosted by the Small Business Association (SBA), and this event takes place the first week of May. This year, the SBA is holding a virtual summit later in the fall. However, you never really need an excuse to celebrate small businesses and the surrounding lending communities. More than half of Americans work for or own a small business, making up nearly two out of every three jobs in the U.S. annually.

While 2021 has been an unprecedented time, companies have been an integral part of returning to normal. To celebrate small businesses and the supporting lending community, we created a video as a thank you for a successful year so far.

The Importance of Supporting Small Businesses

National Small Business Week serves as a reminder of the contributions small businesses make to local communities and the national economy. Whether you own a small business, provide financing, or serve as an advisor, there are many ways to show your support. 

1. Express Your Gratitude

Who do you work with every day? 

Maybe you have excellent employees or a rock star customer. Perhaps you have a mentor you always call when you hit a wall. Take the time to reach out and show your appreciation. While face-to-face communication is great, it can be difficult currently. Sending a personal letter, email, or video is a great way to stay in touch.

2. Partner with Like-Minded Experts

Are you close with other small businesses or advisors in your area? You can strengthen your impact by joining forces. By collaborating, you can reach a wider audience or enhance your existing services. 

3. Understand the Value of Small Business 

One of the best ways small business owners can plan for the future is by knowing the value of their most significant asset. Whether for internal planning or a more formal purpose, such as SBA lending, know the value of your business.  Investing in a business valuation firm with the proper credentials and expertise can help you maximize the value of a small business. 

GCF Business Valuation works with SBA lenders and business brokers across America to provide accurate valuations and appraisals. Our team understands SBA’s business valuation operation procedures and can help you make the best business decisions for all parties involved.

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One year later… Why you need to know the value of your business assets and how it could be the lifeline you are looking for…


The COVID-19 pandemic has affected businesses globally in various ways -- both positively and negatively. For the businesses who were hit hardest, look no further than your tangible assets as a lifeline to ride out the storm from the pandemic.

Todd Taylor, CMEA, Valuation Analyst & Jason Pagan, ASA May 9, 2021

Over the last year, we have identified risk factors and their impact on cash flow for businesses of all industries.  We have identified highly resilient industries such as: insurance, construction, take-out only and drive-through restaurants, and in contrast, the industries that took the brunt of the closures and mask mandates such as fine dining (sit-down only ) restaurants and gyms.  The latter especially has suffered from mask mandates and the changes in customer preferences.


PPP Loans and SBA-EIDL Loans have helped extend the life of many companies, but others are still looking for ways to remain viable. Many companies are applying for collateral loans to help extend the life of the business. A machinery and equipment appraisal can place a current market value of the company’s FF&E, which can assist with a collateral loan.


Assessing whether a business has been impacted but still operating as a going concern, or is facing liquidation and shutdown, is a decision many businesses have faced because of the COVID-19 pandemic. Industries that have a large investment in equipment and physical assets that are facing liquidation still have a fair market value and an equipment appraisal can be performed on these assets.  An equipment appraisal for industries such as gyms and dine-in restaurants can help business owners, bankers, and decision-makers understand the value of saleable assets that remain after cash flow ceases below normal operating levels. 

Understanding the fair value of the equipment is important as the market value of assets can vary dramatically to historical cost methods used in financial reporting or tax basis on the company balance sheets.

Whether your business is impacted by COVID or may be facing a liquidation scenario—our expert appraisers are here to discuss your business situation.  

Connect with the GCF Machinery & Equipment team today.  We are here to help keep small business moving.

To meet our M&E Team

Questions about valuing your business? Please contact us here, and a GCF appraiser will get in touch with you directly.

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Understanding Business Valuation: Why & When You Need One

Business Valuations are critical for sale, transition, and business planning

Steve Mize, ASA, November 18, 2020

If you are an entrepreneur or business owner, understanding business valuation, why, and when you need one is essential. Here’s a quick rundown of what you need to know about valuation, and the process you might expect to encounter in order to get one.

To arrive at an estimation of value, as a starting point you can expect a business valuation professional to:
  • Review financial statements
  • Identify income statement and balance sheet adjustments
  • Review the business operation
  • Determine the appropriate valuation model
  • Review economic and industry data
  • Compare market transactions for similar companies 
The business valuation will also likely consider additional factors:
  • The capital structure of the business 
  • Prospects for future earnings
  • The market value of physical assets
A business valuation professional follows one of three standard approaches: 
  • Cost-based, a balance sheet approach which estimates the value of a business as the sum total of the costs required to create another business of equal economic utility
  • Market-based, which measures the value of a business based on transactions of similar businesses that have taken place in the open market
  • Income-based, which estimates the present value of the economic income the business is expected to generate in the future

Business risk is always an important consideration for valuation. Methodology to interpret risk will vary from one valuation firm to the next.

Who Requests a Business Valuation – and Why is the Valuation Needed?

The need for a business valuation arises for several reasons, and the request can come from different sources. For a closely held business, the valuation plays an important role for purposes that include – but are not limited to – business planning, determination of tax liability, and listing a business for sale.


A prospective lender may request a valuation to support a loan for a business acquisition, partner buy-out, or to refinance debt. If you are pursuing SBA-backed financing, a specific set of valuation guidelines will apply to meet the SBA’s standard operating procedures.

Business Brokers:

If you are considering the sale of all or part of your business, a business broker (acting either for you or a prospective buyer) will need an objective and independent estimate of value for the business to anchor any negotiation. 

CPAs or Financial Advisors:

Whether for the purposes of estate planning or eventual retirement, a CPA or financial advisor can use a business valuation to help you plan for a secure future for you and your family. Gift and estate tax returns that include a well-supported and documented valuation will help defend the value of the business to taxing authorities.


Should you need to defend the value of your business as part of a shareholder dispute, purchase or sale process, or divorce, your attorney will need a credible valuation to support your case.

The Most Durable Business Valuations Are the Product of Science and Art

You’ll hear it said that business valuation calls for both science and art. Valuation science involves extracting a cogent, defensible story from the numbers, while the art deploys human wisdom and experience to ensure that less tangible – but always important – variables receive appropriate consideration. 

If you want to develop a better understanding of business valuation, request GCF’s free guide: How to Navigate the Business Valuation Process Successfully.

Questions about valuing your business? Please contact us here, and a GCF appraiser will get in touch with you directly.

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Different Types of Business Valuation – and How to Get There

Business Valuation Process Varies By Need

Darren Mize, ASA December 1, 2020

What’s driving the request for a business valuation? Different circumstances call for a more – or less – comprehensive business valuation. Your specific need will determine both the timeline for a final report and the actual process a business valuation professional will follow.

Different Types of Business Valuation 

Complete Appraisal

The most detailed form of business valuation, a full-form appraisal looks at every aspect of the business, and documents the methodology and assumptions used to arrive at the value conclusion. This is the level of valuation you need if you expect a challenge or a dispute that could end up in court. The American Society of Appraisers (ASA)and the Institute of Business Appraisers (IBA) issue standards that a comprehensive business appraisal should meet.

Summary Appraisal

A summary appraisal involves the same level of investigation and analysis as the complete appraisal but delivers a summarized version of the salient information. A summary appraisal takes less time to prepare.

Calculation of Value

In some cases, a basic understanding of the value of a business will be sufficient for the task at hand. A calculation of value should not be considered in the same way as an appraisal – it arrives at an approximate value for the business, based on a limited amount of investigation and due diligence. Conducted for a lower cost and within a shorter time frame, it can be a useful tool to support management decisions when there’s not a defined requirement for precision and documentation.

Appraisal Review

When you’d like a second opinion about a business valuationreport, an appraisal review offers commentary and critique that could lead to a better understanding of a business valuation prepared by another party.

Machinery & Equipment Appraisal

In many businesses, machinery and equipment represent a significant component of a business’ value. A rigorous and accurate appraisal of key machinery & equipment, performed by an entity that knows the marketplace for such equipment, can be useful in the sale of assets, to collateralize debt and to provide reliable data to help resolve disputes.

A Typical Process for Valuation

What are the typical phases of a business valuation process, and what are the obligations you and your management team should expect to meet? While the overall process involves a predictable set of steps, the appraisal’s objective will determine the depth and detail an appraiser pursues.

Gathering Information and Performing Due Diligence

  1. Extensive Review of Financial Statements & Comparable Performance Metrics

A comprehensive business appraisal will naturally involve an extensive review of financial statements for your business to develop an understanding of core performance metrics. The business valuation professional will also assemble and analyze industry and economic information, as well as data from comparable business transactions in your industry – if available – to assess the relative performance of your business.

  1. Live Review & Discussion with Key Managers     

The most reliable business valuations involve boots on the ground to see the business in operation, and interviews with key members of the management team (when authorized) – numbers alone cannot and should not tell the whole story.

  1. Analysis & Report Preparation       

Once these inputs have been gathered, verified and appropriately compared, it’s time to analyze for value and prepare a report that is meaningful to both the business owner and the party who requested the valuation.

The same basic business valuation processapplies to less-intensive business valuations; the difference among various types shows up in the depth, detail and documentation of rationale a report provides, which depends, of course, on the purpose it needs to serve.

If you want to learn more about the business valuation process, request GCF’s free guide: How to Navigate the Business Valuation Process Successfully.

Questions about valuing your business? Please contact us here, and a GCF appraiser will get in touch with you directly.

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What Factors Determine the Value of a Business?

Understanding the Business Valuation Equation

Steve Mize, ASA, January 6, 2021

GCF was engaged to value a pharmacy and the lender quickly explained how “strong” the deal was even stating: "This is a slam dunk!" So, we began the due diligence process and immediately discovered:

If there’s a conversation underway about requesting a business valuation, the underlying question will always be around what exactly determines value.

Most business owners, lenders, and other financial professionals understand that while there is a set of common, non-negotiable factors that goes into the valuation equation, other factors (and the weight assigned to them) will vary by industry, business structure, and other individual characteristics of the business under review.

Common assumptions around value include emphasis on physical assets, track record for financial performance, trademarks, patents or even significant, long-term customer relationships. Of course each of these factors does contribute to total value, but often not as much some would expect.

Cash Flow Rules

The indisputable king of a business valuation is cash flow. As every business owner knows, sales are just sales until they deliver a profit – ideally in a timely and repeatable fashion.

So while a business valuation professional will always study and consider the business’ total financial picture as revealed by its financial statements, the business appraiser is ultimately looking for a reliable pattern of positive cash flow to anchor the value of a business. When there’s a solid picture in place for cash flow, every other aspect of the financial statements is more dependable, and the business is in a strong position to support maximum value.

Factoring Business Risk Into Valuation

Cash flow is king, but then there’s risk. Always. So the next question is how much risk? And what are the cash flow implications of that risk?

Risk presents itself in many forms, and the experienced business valuation professional looks at each one to come up with an assessment of total risk facing the business, both long-term and short-term. Short-term risk might include a situation where the business is overly reliant on one or two customers for a substantial portion of its cash flow – what’s the trajectory if one of those customers cuts back or goes away altogether? Other businesses face risk built in by seasonality and weather, and still others are subject to changes in trade policy or supply chain risk.

Longer-term risks are often tied to the general economic outlook, both local to where the business operates and more broadly. Or they involve the industry’s maturity, and that of any technology at the heart of the business – and emerging innovation that could change the playing field.

Often the most significant “value-add” provided by a business valuation is the comprehensive, clear-headed and objective assessment of risk, and its meaningful quantification. Experienced human intelligence plays an irreplaceable role in assessing individual business risk. Said another way, data is just data without human intelligence to evaluate actual risk.

Value Based on Capital Equipment and Other Assets

Yes, capital equipment can contribute to and is included in the company's total value. The equipment's age and condition are factors, as are its likely (or unlikely) liquidity in the event of a sale. Unless their equipment is specialized and in high demand, business owners can expect to see relatively low estimates for it as part of the total valuation.

Other assets commonly expected to contribute more value than they actually do include a business’ unique differentiator or proprietary product. For the purposes of the business valuation equation, the more closely those assets tie into actual cash flow, the more they contribute to value. 

If you want to develop a better understanding of business valuation, request GCF’s free guide: How to Navigate the Business Valuation Process Successfully.

Questions about valuing your business? Please contact us here, and a GCF appraiser will get in touch with you directly.

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X Factors In the Business Valuation Formula

Professional Expertise, Insight, and Industry Experience Bring Crucial Context

Darren Mize, ASA January 7, 2021

GCF was engaged to value a pharmacy and the lender quickly explained how “strong” the deal was even stating: "This is a slam dunk!" So, we began the due diligence process and immediately discovered:

Whether you are a business ownera lendera business broker or financial advisor requesting a business valuation, you rely on the valuation company’s commitment to:

  • Accuracy
  • Timeliness
  • A holistic, defensible analysis that thoughtfully assesses and weighs both tangible and intangible elements that contribute to the value of the business, and supports the stated intent of the business valuation

Where – and When – Do Formulas and Algorithms Apply?

While every business valuation company applies its own formulas and algorithms to expedite the capture and analysis of financial data, these formulas are just one of several essential tools in the appraiser’s tool kit.

Basic macros make the process of importing and organizing data from financial reports as efficient as possible. Seasoned business valuation professionals have developed systems that enable them to look at a lot of data quickly, and isolate key variables for review – and most importantly, they know how the business valuation formulas have been built. This means they know what the patterns should look like, more or less, and when it’s time to break something down and study it more closely in case there’s underlying risk to address. One variable even just slightly off can compound quickly, and render a business valuation unreliable.

Speed is important to the process, but not if it sacrifices accuracy. And while the right, current technology is essential, it should never serve as a stand-in for human intelligence.  

Cookie Cutters and Black Boxes

If you need an immediate estimate of the range into which your business valuation might fall, an online valuation calculator can provide preliminary information. By engaging in the process of responding to standard, formulaic questions and plugging in numbers, you’ll begin to get a sense for the metrics involved with typical business valuation models.

The end product from an online valuation calculator won’t provide much in the way of analysis. If the marketplace is active, however, you should gain a sense of how the greater marketplace assigns value. The exercise is similar to when the real estate agent pulls comps to help you price your house – you have a data point based on transactions for broadly similar entities. 

Up another step on the ladder of expertise, you’ll find business valuation companies that provide a textbook business valuation, and promise your report quickly. Again, you’ll do most of the work to complete a detailed questionnaire and input financial data. There will be a degree of human interface, but likely no site visits or in-person interviews about your business.

For either version of the entry-level business valuation, you’ll end up with a serviceable report that lays out the basic groundwork for business valuation. What you won’t get is an opportunity to genuinely understand the assumptions and methodology, or ask questions and challenge findings. And you won’t find much discussion about intangibles. These models rely on a one-and-done approach, so they’re executed quickly – but they may well suffice when you don’t have a lot on the line. 

When You Need the Most Robust and Defensible Business Valuation

Above circumstances aside, the day will come when you need a thorough and reliable business valuation, one where the business valuation formula genuinely reflects everything your business represents, and one that ensures you will receive all possible credit in any transaction or dispute. 

In cases like this, accuracy matters more than ever. And while it’s always ideal to get it right the first time, both you and your valuation firm deserve the time and discretion to revisit an initial finding that doesn’t quite add up. Even a small discrepancy can have major implications for your final valuation. 

Experience. Industry Expertise. Professional and Managerial Insight.

In many cases, a valuation will set the stage for the future of your business. Whether that future involves new financing, a sale or merger, additional equity participation – or new roads ahead as you plan an exit strategy, thoroughness and accuracy will pay more dividends than a speedy, plug-and-play deliverable.

For the most airtight valuation possible, it’s important to build human intelligence into the process to interpret the big picture and spot any red flags or inconsistencies. And yes, technology can highlight an outlier, but it can’t tell you why it cropped up – and technology can’t discern between a simple error or oversight on the front end and a real discrepancy that deserves further study.  

There’s no substitute for what hands-on experience can contribute to the business valuation formula. Experience matters to the quality of the valuation report, whether it’s the product of a long and varied history completing different types of valuations for a broad range of entities – or brought from direct operating roles in industry, lending and finance. Regardless of its origins, experience supports facility with the numbers and an instinct to know when the story told by the numbers is missing a layer that could make a material difference. 

And while conventional financial analysis plays an important role in the process, true valuation expertise plumbs deeper because the intent and endpoint serve a different need. This is where training and professional business valuation credentials are important, such as those earned from the following organizations:

  • American Society of Appraisers (ASA)
  • National Association of Certified Valuation Analysts (CVA and CBA)
  • American Institute of Certified Public Accountants (ABV)
  • Institute of Business Appraisers (IBA)
  • International Society of Business Appraisers (BCA)

A valuation professional trained and certified by these organizations will ensure the valuation meets all established standards and holds up to the daylight brought in with deeper scrutiny or even a challenge from another party.

If you want to develop a better understanding of business valuation, request GCF’s free guide: How to Navigate the Business Valuation Process Successfully.

Questions about valuing your business? Please contact us here, and a GCF appraiser will get in touch with you directly.

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Is There a Preferred Approach to Valuing a Company For Sale?

Darren Mize, ASA, September 15, 2020

Let's review the 3 approaches to value:

  • Cost Approach
  • Market Approach
  • Income Approach

The Cost Approach

The Cost approach relies on the business's balance sheet. So, unless the company is heavily invested in assets this approach is rarely used.

The Market Approach

The Market approach relies on comparable business transactions within the same industry. The key to using this approach is the reliability of good data. (see PeerComps).

The Income Approach

The Income approach is derived from 2 key variables: Cash Flow and Risk.

So, do I just pick one of the above?

It's simply not that simple. Every business is different and comes with its own unique set of characteristics, which have to be considered.

At GCF, our analysts use a combination of the Market and Income Approach's in most of our valuation engagements with with varying weights on each method. If you are working on a business and curious on how to best approach value on a business you are working on, give us a call.

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“Add-Backs” and How They Impact Business Value

Steve Mize, ASA September 1, 2020

One of the most challenging aspects of valuing a small business is the use of Income Statement Adjustments, otherwise known as “add-backs”. For smaller businesses add-backs are common, but can they be verified?

Add-Backs - The Questions We're Asking

• Can the expense being added back be traced back to the source document's Income Statement (P&L or Tax Return) . If not, it can't be used.

• Does the expense have any impact on revenue or efficiency? Expenses directly related to generating revenue or improving cash flow, are not considered as add-backs.

• Is the add-back strategic in nature or directly related to a particular buyer? Add-backs specific to the buyer / buyer’s company are considered strategic and cannot be used in determining Fair Market Value.

• Is the add-back truly non-recurring or “one time”? This can be speculative but at GCF we follow a simple rule, if the expense was unexpected and will never occur again we will consider it.

Supporting the Add-Back

  1. Identify the actual amount that was expensed on the tax return or financial statement being used as the source document.
  2. Identify where the expense can be found.
  3. If the item is part of a larger expense category, generate a General Ledger Report (CPA or who ever prepares the financial data) that provides the detail of each expense under that category highlighting the add-back being used
  4. Explain why this expense will not continue with the sale.

Do Add-backs Impact Value

Yes they do. Add-backs contribute to financial risk, so the more of them there are, the more risk there is which is unfavorable to value. It's best to eliminate as many, if not all, discretionary add-backs to maximize value. If they cannon be eliminated, document them with as much detail as possible. Using the guideline above, lenders are likely to accept them.

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The #1 Question to ask on Contractor businesses

Jason Pagan, ASA

How is revenue being booked on contracts?

The short answer: When accounting for contractual work, how revenue and expenses are booked on time-based projects (that span longer than 60 days) will have a direct reflection on cash flow and business value.

Why is this question critical to the value of the business and the loan you are underwriting?

There are 2 accepted methods for this:

Completed Contract Method (conservative approach):

  • Expenses are being recorded as the contractor work is being performed.
  • Revenue is recorded upon completion of the job.

Percentage of Completion Method (most common approach):

  • As the contractor moves the project the revenue, expenses are tracked according to completion milestones.

The RED FLAG to be on the lookout for:

  • Mismatched trends in accounts receivables and revenue OR above average cash flow margins
  • Make sure you understand the sellers revenue recognition and that the accounting method aligns accordingly.
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Beware of the so-called “Slam Dunk” deal

Steve Mize, ASA September 15, 2020

GCF was engaged to value a pharmacy and the lender quickly explained how “strong” the deal was even stating: "This is a slam dunk!" So, we began the due diligence process and immediately discovered:

Profit margins well above the industry average.

Initial thoughts suggested “compounding” (which typically carry a higher profit margin). However, the lender provided limited data for actual prescriptions filled.   So, we requested:

  • Total Rx filled
  • Rx average price
  • % of third party insurance vs cash
  • List of suppliers
  • List of the top 10 Rx sold
  • Top 10 referral sources   

Upon review of the above data points, we discovered:

  1. The amount of “cash” sales were astoundingly higher than the industry average;
  2. The top 5 Rx were narcotics (think of oxycodone) and represented the majority of the Rx filled;
  3. There were 3 referral sources (all pain management practices) that accounted for nearly 50% of the total Rx.  We uncovered numerous articles about “pill mills” and their referring doctors (typically pain management practices).

So, did the value support the loan amount?

NO. Here's why:

On the surface, cash flow supported the purchase price, BUT, further due diligence uncovered risk factors that were unfavorable to value. The deal was not that “strong” after all.

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