Business Valuation Blog | Understanding Buying / Selling a Company

How do I Determine the Value My Business is Worth?

Posted by Business Valuation Specialists LLC on Nov 15, 2018 11:07:00 AM

value my business

When you're trying to sell or improve your business, part of that process is being able to determine the value of that company. Though that may seem like a relatively straightforward process, most business owners still don't know the answer to the question "What is the real value my business is worth?" There are a number of different ways to develop an approximate value for your company, there are only a few ways to determine that value accurately and in a way that puts you in a position of strength for a range of different negotiation situations. Here's a quick look at different ways to value your business.

How do I Determine the Value My Business is Worth?

  • Ask for offers on your business. This is one of the worst ways to get an idea of what your company is worth, because you'll be beset by people who may be far off on both ends of the spectrum, though it's much more typical that you'll receive lowball offers at this point. This doesn't mean you can simply add on to these offers to estimate your business' true value, as there are many more factors that must be taken into account in determining your company's value.
  • Do your own research. You could look at how much similar companies have sold for in the past and estimate your company's value based on that information. However, it can lead to significant inaccuracies. What condition was the market in when that company sold? What was the value of their brand and their reputation for innovation? What about differences in the market sector that is served or the perceived value of their products and services? These factors all impact value.
  • Check with a real estate agent. A real estate agent can give you a more accurate picture of your company's value, but that value can be influenced by their interest in how quickly they want your company to sell so that they can receive their commission check. If it's been a rough month, they may lowball your business value to improve their short-term income, or if it's been a great month, they may come up with a high figure hoping for more income down the road. 
  • Have a professional appraisal performed. This is the best way to have the value of your business determined. Professional appraisers use a range of techniques that have learned that have been tested in real-world situations. This means that they're very good at determining the exact value of your business in a wide range of situations, whether you're just looking for a leg up on business growth or are preparing for a sale.

By understanding the differences between these options in determining business value, you can better answer the question "how do I value my business?" without a lot of worry about whether the value you're receiving is an accurate one or not. Remember, if you want the best quality appraisal report for your company's value, it's important that you choose to only work with a certified business valuation specialist. This type of appraisal uses a quality set of methodologies that have been tested in a wide range of real-world situations that can be used in a number of different applications.

Tags: value my business

What Kind of Skills Does a Business Appraiser Need to Have?

Posted by Business Valuation Specialists LLC on Nov 7, 2018 5:14:00 PM

When you're in a position to have a business appraisal performed on your company, have you ever thought about the vast amount of knowledge, skills and expertise that a certified business appraiser needs to have to be able to determine the value of your business? It's a very specialized skill set that is often overlooked in everyday life. Here's a quick look at the skills that are required of business valuation specialists as they go about their jobs every day.

What Kind of Skills Does a Business Appraiser Need to Have?

  • Serious attention to detail. Consider, for a moment, the complexities of your business. Now imagine having to determine all those complexities within a very short period of time! Business valuation specialists need to have a serious ability to ferret out every detail about your business that is necessary to create an accurate assessment of its value.
  • Ability to work through complex calculations. The market is up, the market is down, one business is very similar, another is very different. There are a wide range of factors that come into play when calculating an accurate business value, requiring an appraiser to have a very strong set of math skills to keep up with constant changes during the process.
  • Thirst for knowledge. Because an appraiser needs to get into the nitty-gritty details of every aspect of your business, they need to have an innate thirst for knowledge. Not only do they need to understand the value of your products, they need to understand where your company is innovative and where it needs to catch up. This requires a strong love for learning.
  • Strong research abilities. Which other businesses is your business similar to and which ones is it different than? Being able to pick out these differences and discover the fine lines that make companies unique is a definite strength when an appraiser is working on different company valuations all day.
  • Real-world communication skills. Have you ever worked with someone who just couldn't explain the process? Because business valuation specialists have to work with their clients to develop a fair value for a business, they need to have strong communication skills to get the job done right. This allows them to ask the right question for every situation that may arise.
  • Ability to adapt to changing circumstances. Is this company going out of business because of a bankruptcy or is it being sold at a premium to the perfect buyer? Because every appraisal is different, it requires the business valuation specialist to go into each situation with the ability to adapt to that particular case and apply their knowledge fairly across the board.

A business appraiser needs a diverse set of skills to be able to perform the job they do on a daily basis. It takes a lot of time and dedication to develop these skills, whether through a training program or through on-the-job experience. When you need to have your business appraised, do you want to have the business appraisal determined by someone who is simply making a guess based on their general experience, versus a professional who has taken significant time and effort to become certified and develop these skills? Working with a certified business appraisal specialist delivers real value for your company

Tags: Business Appraiser

How a Company Valuation is Different Between Business Organization Types

Posted by Business Valuation Specialists LLC on Oct 31, 2018 1:39:00 PM

How is your business organized? Many companies are aware of at least some of the benefits of organizing under each of the different business types, but did you know that there is at least a little difference between how each of these companies are organized and how they must be handled in the company valuation process? Here's a quick look at the differences between each basic business organization type and the impact it can have on your overall appraisal process.

How a Company Valuation is Different Between Business Organization Types

Sole Proprietorship

A sole proprietorship is the most basic legal organization a business can have. It can be one or multiple people acting in the interest of the business, but it's assumed that they act as one body in the interest of the company. It provides very little in terms of legal protection, so if your company were to be sued, you could also lose your home and other assets in the process. The higher level of liability must be factored into the potential for losses and any mixing of personal and business funds must be sorted out in the appraisal process.

Partnership

A partnership is more detailed than a sole proprietorship and should have some documentation laid out at the beginning of the partnership to determine who owns what amount of the company and what must be done should the partnership be dissolved. It helps avoid arguments at the end of the business by having everything in line ahead of time with regards to how to split up the profits or losses when the business closes or is sold. This process is taken into account during appraisal with each partner's share calculated from the total appraised value.

S-Corporation

Also referred to as a pass-through corporation, this type of corporation requires more paperwork to establish as a proper corporation, but also provides legal protections to the owners. However, unlike a C-corporation, an S-corporation passes earnings through to the owners, so rather than the corporation paying taxes on profits, the owners report these profits and pay the taxes on them on their personal tax returns. This can create additional growth that is factored in during an appraisal.

C-Corporation

A C-corporation is a fully incorporated entity that exists completely separate from the owners. Like the S-corporation, it requires more paperwork to incorporate, but the taxes on profits are paid by the corporation before they are distributed to the owners, at which point the owners also pay taxes. It also provides more legal protection to the owners as it stands as its own entity. This double taxation is taken into account in terms of the corporation's growth in appraisal.

Limited Liability Company

A limited liability company or LLC is a company or corporation that is specifically set up to limit the amount of liability a company or its owners may be exposed to in the course of doing business. It can be set up in any number of organization types, but is generally designed to provide protection to the owners rather than any specific tax or appraisal benefits.

By understanding the differences between business organization types, you can gain a better understanding of how each organization works and how it affects the way that you do business on a daily basis. It also provides you with opportunity to better understand the impact it can have on your company when it's time to have an appraisal performed. Make sure to work with a certified business appraiser when you have your company valuation performed to ensure you're getting the best possible information and accuracy out of your investment.

Tags: company valuation

What is the Right Method for an Appraisal of my Company?

Posted by Business Valuation Specialists LLC on Oct 24, 2018 1:49:00 PM

Only when you know your worth can you negotiate with confidence and get the price you deserve for selling the business you worked so hard to build. There are many methods of appraising a company: which is right for you? 

Different Ways of Appraising My Company 

The methods of appraising a business fall into three different buckets: income, market, and asset. Here's what those terms reflect: 

Income-based appraisal

Income-based approaches fall into two categories: Discounted cash flow and capitalization of earnings. 

In the capitalization approach, a business appraiser will look at your cash flow in recent years to gauge a company value. 

In the discounted future earnings method, an appraiser will gauge the future value of the company based on its present financial state. Appraisers often use this method when the company's cash flow is unsteady, say when a company had a lean year but otherwise has enjoyed a solid track record. 

Asset-based appraisal 

Asset-based appraisal methods evaluate the company's assets versus their liabilities. An appraiser will value the assets using a fair market approach, then subtract the liabilities from the total of the assets for a business valuation. Company assets include commercial real estate and land owned by your business. 

This method works well when the company has a lot of physical assets, for instance when valuing a farm. Asset-based appraisals also work well with companies that are losing value, since the value of the assets is more or less fixed.

In a down market where there may be a glut of resources on the market, an asset-based appraisal may undervalue the company's true worth because the equipment values are lower than typical due to supply and demand. 

Market-based appraisal 

In a market-based valuation, an appraiser will research recent business deals in your niche and geographic area. By understanding how much another dental clinic sold for, the appraiser can estimate the asking price point for your dental business. 

The market-based valuation is accurate and highly useful, since no one can argue with financial data. However, this approach only makes sense when there are recent deals among companies in a similar line of business, similar area, and similar size.

Additionally, market-based approaches do not work as well for sole proprietor companies, where it's much harder to compare like with like because the business owner's relationship with clients influences the value of the company. 

Getting an Appraisal of My Company: Which Method is Right for Me? 

Once you have an understanding of the different ways of completing a business valuation, you are naturally asking yourself which method is right for your business. 

There is no one size fits all answer to the question, since there are so many variables. A skilled appraiser will interview you to learn more about your company, then suggest one or more appraisal methods that will tell an accurate story of your company's value. 

While each method has its pros and cons, all of these valuation methods can provide invaluable data before you put your company up for sale. Too many business owners overvalue their company due to emotional factors like pride in the business they worked to build. Setting a company value too high sabotages sale, as it drives away potential buyers and leaves you on the hook until you get willing to bargain. 

If you're serious about selling your business and commanding what it's really worth, seek out a business appraiser who has experience valuing companies in your area and industry. 

Tags: appraisal of my company

What goes on behind the scenes at business valuation companies?

Posted by Business Valuation Specialists LLC on Oct 17, 2018 11:40:00 AM

Having a company appraisal performed can seem like a simple task, but it's actually much more complex than it first appears. Though you may see the beginning and end result, you're probably not aware of the many tasks that take place in the middle to ensure that you're going to get the most accurate, reliable business appraisal that you can possibly expect. But what exactly takes place behind the scenes and how does it impact the final valuation report that you receive from your appraiser? Here's a quick look at the process from beginning to end to help get you started.

What goes on behind the scenes at business valuation companies?

  • Intake: However you get to the particular business appraisal firm that you're now speaking to, it's of vital importance that you're routed to the correct appraisal specialist. You may be asked several questions about your company's business, its size and the reason you're getting the appraisal performed. This all happens to ensure that you're sent to the appraiser with the best experience and track record for your specific needs. A quality business valuation firm will have experience in the trenches, not just determining value by the book.
  • Initial Information Gathering: Though you'll have answered some questions, there are probably many more waiting to be asked. Why? The type of appraisal you receive is, in some cases, dictated by law. This is to ensure that in some high-stress situations, everyone is treated fairly. The appraiser will also ask about your competitors, your position in the market as you see it and the overall market conditions to get an idea of how you view these factors that can impact your company's value. A solid look at your finances will probably take place at this time.
  • Research: Next, the appraiser goes into independent research mode. They take the time to look at your industry, the market, your company's specific strengths and weaknesses, its reputation in the community and industry, how it fares against competitors in a completely sterile setting and how it's doing in the market as a whole. This may also include a site visit where the appraiser takes a good, solid look around your entire business, finding areas where it's performing well compared to the competition and areas where it may need improvement.
  • Report Preparation: The valuation specialist will now take a significant amount of time to calculate the company valuation and prepare a well-researched appraisal report that follows standardized methodologies to develop a final value for your company, This will include a wide range of information to ensure its accuracy. At this time, the appraiser may have another valuation specialist take a look at the report to ensure accuracy and will work with you on any concerns you have about inaccurate values included in the report.

When you have a solid grasp of not only what happens during a business appraisal but also what happens behind the scenes at business valuation companies, you walk away with a much more solid grasp of how those companies work and what to expect from the process. This makes it much easier for you to appreciate the work that goes on to provide you with a solid valuation report on your business and the level of accuracy and integrity that you should come to expect.

Tags: Business Valuation

How to Prepare for an Acquisition With a Business Appraisal

Posted by Business Valuation Specialists LLC on Oct 10, 2018 6:34:00 PM

Valuation is essential in an acquisition, no matter which side of the deal you find yourself on. Learn how to prepare for an acquisition and the role of a business appraisal in determining company valuation. 

Organize Your Business Documents 

The acquisition process is lengthy, but it will go smoother if your financials, taxes, and other business documents are in order. Take care of any outstanding issues before you put your company up for sale, pay taxes, and sort through all documentation that tells your company's story. This will make you look more attractive to potential buyers and streamline the acquisition process. Getting organized also helps you prepare for an appraisal, which will determine the valuation of your company. 

Find Trusted Partners

You can't go through an acquisition alone, so before you seek buyers, find trusted partners to help you through the process. Look for an attorney, a certified appraiser, a tax adviser, and an investment banker or other financial professional. These partners can help you manage your expectations going into the acquisition and position your business for a successful sale. 

Do Your Market Research 

While your trusted partners can help you understand the market, many entrepreneurs like to do their own research to best understand the strengths, opportunities, weaknesses, and threats around the acquisition.

Review recent business deals in your industry to track trends. Look for companies in your industry that might be acquiring smaller players, then consider which ones are a good match for you. Ask yourself questions like "Which companies share my values?" or "Who understands my competitive advantages?" 

This helps you understand the acquisition landscape, communicate your value in meetings, and have a position of power in the negotiation. 

Get a Business Appraisal 

You may not think of an appraisal when considering how to prepare for an acquisition, but it is a necessary step. An appraisal calculates your company's worth within the market -- say, compared to similar businesses in your industry and market. 

As an entrepreneur, you are hardly objective in calculating your company's value. You are emotionally attached. Third-party certification of your business value helps you screen offers, so you know when a potential buyer is underbidding and when they are making a fair offer for the company you worked hard to build. 

Review the appraisal carefully and ask questions about the valuation. When you understand why your company was valued at a certain price and what factors affect its value, you will be a stronger negotiator.

Get Stakeholders on Board

While you may be ready to sell, not all stakeholders will understand the decision. The process will run smoother if you communicate clearly to management, board members, and other stakeholders. Your personnel, clients, and relationships are part of your value as a business, as any good appraiser will note. By retaining these partnerships going into the sale, you can keep your company valuation high and avoid infighting that could sabotage the deal at the last minute. 

The research, business appraisal, and opinion of professional advisers will help you explain your decision making and get key stakeholders on board before you pursue an acquisition. This is critical to the success of the deal, because your business looks better when everyone is on board than when there is a lack of clarity or transparency. 

By taking these steps before the acquisition, you can understand the position of your company, navigate every step of the acquisition phase with confidence, and come through the process with ease. 

Tags: how to prepare for an acquisition

Partnership Dissolution: Using a Business Valuation to Buyout a Partner

Posted by Business Valuation Specialists LLC on Oct 3, 2018 9:56:00 AM

You've worked hard in a partnership for a number of years or even decades to build your business, but one way or another, it's time to dissolve the partnership. Whether it's a health issue, loss of passion for the industry or any number of other reasons, dissolving a partnership is tough enough without trying to figure out how the value of the business needs to be split. That's one of the many reasons why it's a great reason for using a business valuation to buyout a partner. It allows you to use the valuation report as the basis for the buyout using a report that is created by an impartial third party. Here's how the process works and how to make it work.

Partnership Dissolution: Using a Business Valuation to Buyout a Partner

Partnership dissolution can be painful on both sides of the situation. The partner who is leaving may have a certain amount of guilt, but also a certain feeling of entitlement after having spent years building up the business. The partner or partners who are staying may feel anger over the partner who is leaving, feeling abandoned in the business and feeling entitled to hang onto a larger share of the company. Many businesses, and friendships, are split apart over the issues that may arise during a partnership dissolution.

But who is in the right in this situation? Partnerships should usually be started with a partnership agreement, but this is unfortunately not always the case. When the partnership is then dissolved later on, there is no agreement as to what should happen to the business property and assets at that time. The partner who is leaving may feel that they're leaving a complete company behind, and therefore deserve the share of the retirement that they won't otherwise achieve when they leave. The partner left behind may feel that they are having additional burdens placed upon them if they want to keep the company running, robbing the business of vital assets and equity and, in turn, their retirement funds. Which party is in the right?

Because of the hard feelings that can come out of situations such as this, many courts demand that the fair market value be determined by a certified business valuation specialist. A certified specialist is an independent third party who has no stake in either side of the partnership, ensuring that their valuation will be impartial and fair to both sides. The methodologies they use have been tested to hold up well in court, so the report they provide will deliver a fair and equitable value to each partner. For this reason, having a professional business appraisal performed at the dissolution of the partnership gives you a great point to start negotiations.

Though a partnership dissolution is a difficult, stressful time, using a business valuation to buyout a partner helps reduce that stress while providing you with a solid basis for determining the overall value of your business. Many businesses use business appraisals created by a certified business valuation specialist to ensure that the calculations and report that is created are completely impartial to either side of the dissolution. This makes it much easier for both sides to agree, as the value is determined by an independent third party.

Tags: using a business valuation to buyout a partner

What's involved when you're preparing for a business sale?

Posted by Business Valuation Specialists LLC on Sep 26, 2018 12:51:00 PM

It doesn't matter whether you're getting ready to sell the business you've put your blood, sweat and tears into for decades or are simply ready to move on to your next big entrepreneurial adventure. When you're preparing for a business sale, a lot of business owners tend to skip right to the chase, simply listing the business for what it's current value is. But what if you could start by learning how to sell your business the right way, the way that would maximize your profit on the sale to get the best return on your investment during the final few months or years of operation? Here's a quick look on how to do it right.

What's involved when you're preparing for a business sale?

Unfortunately, when many businesses decide to close their doors, it happens after many years of dedicated ownership and hard work. At the point that the decision is made, many business owners just want to get done with the process. This is one of the worst approaches to take, as it means you lose some solid potential profit. Why? Consider how you've started running and building your business.

Did you build your company based on a lot of emotional decisions or did you spend some solid time studying the figures, looking at what made sense and going with what would work? Why would it make any more sense to shift from that approach now that it's time to sell your company? By taking the time to go through the process logically and thoughtfully, you can benefit from an increased sale price and better overall profits.

One of the best ways to go through this process is by starting out with a preliminary business appraisal. When you have a business valuation performed, the appraiser takes a solid look at your company's finances, assets, liabilities and overall condition. The appraiser will provide you with that information through a written report, which provides you with valuable insights into your company's current condition. But how does that impact your company's value?

Imagine that your business has a great reputation for innovation, but has a high level of bad debts in its accounts receivable or high overhead costs. When that shows up in your valuation report, you have the option to change those issues. By keeping your high points where they are or making them better while improving the rough patches in your company, you can quickly improve your company's overall value, allowing you to greatly benefit from the change at the time of sale.

You can then use the original valuation report and have a second report run after you've made changes, which helps you track how much the value of your company has improved. This, in turn, allows you to decide whether you want to make additional improvements or whether it's time to make the sale from an educated standpoint. 

By knowing what to do to get the most from your business, you can make a huge difference when you're preparing for a business sale. Take the tactics used by successful entrepreneurs everywhere whose companies sell for more by having a business appraisal performed. Make sure to check whether your business valuation specialist has gone through a certification process, as this ensures that they have an excellent mix of education, knowledge and experience to put to use for your business sale.

Tags: preparing for a business sale

Why are your reasons for a business valuation important?

Posted by Business Valuation Specialists LLC on Sep 19, 2018 4:21:00 PM

When you run a business, there are any number of reasons why you may want to figure out the value of that enterprise. Unfortunately, the different reasons for a business valuation mean there are a number of different ways to determine that value. Let's take a good look at exactly what kind of situations are used for a business valuation and why they cause different values.

Why are your reasons for a business valuation important?

  • Business sale. This is one of the primary reasons a business valuation is performed. The sale of a business causes almost all business owners to wonder what their business is worth and whether they're asking the right price for it. Though this process is sometimes handled by a realtor, that doesn't give you the information you need to make improvements prior to a sale, increasing your business' value and improving your negotiating position.
  • Passing on ownership. Though this isn't done as often as valuations for the sale of a business, it probably should be. You've put a lot of blood, sweat and tears into your company, growing its reputation and its value over the years. Taking the time to get a valuation performed helps ensure you'll be in that much of a better position to enjoy your golden years.
  • Partnership dissolution. This can involve either a platonic partnership or a marriage. The side that is staying in the company wants to pay the other party the lowest possible price while the other party wants everything they can get out of it. That's one of the reasons why this type of valuation must be a fair market value calculation.
  • Settling an estate. This can be a tough situation, especially when there are multiple heirs to the business, some of whom want the business sold quickly and others who want to wait for the right price. The approach used by the appraiser typically depends on the overall views of all the heirs, allowing for a reasonable amount of time to find the right buyer.
  • Merger or acquisition. When a business is absorbed into another one, it's usually a weaker business being absorbed by a stronger one. That's not always the case, however. If business professionals feel they can go it better together than alone, if one has a reputation for innovation or any number of other reasons, a valuation specialist should be used.
  • Going public. How much do you want to start those initial shares out at anyway? There are a number of valuation techniques that can be used to compare your currently private company to a public one, allowing you to determine your company's value and price those shares at a rate that is fair to your own investment.
  • Liquidation. Though no business owner wants to consider this specific issue, it's a matter of fact for some businesses. Wouldn't you rather get a better idea of what your assets are worth before they hit the auctioneer's block?

By understanding the reasons for a business valuation, you have a better grasp of why these reasons can shift the value of your business one way or the other. When you need to have a business valuation performed, for whatever reason, you'll want to make sure that you're working with a certified business valuation specialist. The training, experience and expertise they have means you'll get a valuation report that reflects your business' specific circumstances.

Tags: reasons for a business valuation

How do you determine the value of a business over its competitors?

Posted by Business Valuation Specialists LLC on Sep 12, 2018 9:20:00 AM

Whether you are selling an established business or looking to raise money for a startup, it's important to be able to demonstrate the value of your company vis a vis the competition. This is something many business appraisals fail to take into account, yet it fundamental when you think about it: How can an investor decide whether a company is attractive without understanding where it fits in the market? Find out how to get the valuation of a business over its competitors. 

Market-based approaches to business valuations see where a company fits in the market. For publicly traded companies, the Guideline Public Company Method makes sense. This form of business appraisal looks at prices that investors paid for businesses like yours, for instance how much similar businesses raised in Series A rounds. 

If the business is not publicly traded, the Guideline Company Transactions Method may be used. In this method, a business appraiser estimates the value of companies similar to your business. For example, an appraiser taking the value of a dental clinic may look for dental practices in the same city. When comparing your company to others, timeliness is key. Markets are always changing, so a sale that is a few years old may not speak to the value of your business at present. 

Tangible data is only one part of the business valuation equation. Any skilled appraiser understands that your company's personnel, knowledge base, and community reputation affect your market value. If you've been a family-owned business for decades and treat your clients as if they are family, this value cannot transfer with the business name and inventory. The connection is too personal. If your sales team is the best in the business and they're remaining with the company, on the other hand, the business value won't take as much of a hit. A skilled appraiser will ask the right questions to gauge the intangible essentials that make your business uniquely valuable and provide a thorough appraisal that communicates your value to investors or potential buyers. 

When comparing your company to others like it, an appraiser will look at your position from a multitude of angles. There may be some areas where your company is dominating the competition, but there may be areas where your company is lagging behind. By looking at it objectively, the appraisal will deliver an accurate valuation of your position in the industry. 

If you're thinking of selling the business down the road, it can be helpful to get a business appraisal in advance, so you can see where you fall in the marketplace. Knowing what you are worth compared with your competition, you can make informed decisions over business improvements with the goal of boosting your position in the marketplace when you're ready to sell, so you can maximize that return on investment.  

No matter which method your appraiser decides to use to value your company vis a vis its competitors, they should be able to talk you through the appraisal in clear language and explain how they arrived at the business valuation listed on the appraisal. 

You've only got one chance to impress investors with your offering, and a solid business valuation is one part of this package. Now that you understand how the local market affects your business value, you can select an appraiser who demonstrate familiarity with your industry, your market, and the business appraisal process. 

Tags: how do you determine the value of a business