Business Valuation Blog | Understanding Buying / Selling a Company

Interesting Issues in Valuing a Software Company

Posted by Business Valuation Specialists LLC on Jun 20, 2018 3:46:00 PM

Does your business involve creating software for your clients or developing solutions to get their systems and programs working together seamlessly? If so, you need to know that valuing a software company is a vital part of your disaster recovery plan. Why? Though it can seem like simply replacing your computers is not a major investment for your business, having your company valued ahead of time can help you get back to work more quickly. Here's a quick look at what happened when one software firm faced an office flood and how having a valuation in place would have made the recovery process go much more smoothly.

Interesting Issues in Valuing a Software Company

Some years ago, Qlue Consulting in the Research Triangle area of Raleigh, North Carolina provided a range of software services for their clients. Because they specialized in integrating a wide range of aging equipment and developing creative solutions for their clients, their office housed a number of systems that were difficult to replace, from aging mainframes to computer banks that housed dozens of different operating systems and software programs. This allowed them to quickly test their solutions in-office and deliver a completed, tested solution for their clients.

Housed in a multi-purpose structure, the business was on the ground floor with several apartments in the levels above it. The business had insurance to cover any disasters that may happen to the company, but assumed that their insurance company could react quickly to a claim. For that reason, they hadn't had a business valuation performed.

The apartment renter on the third floor above their office was out of town at a conference for a week when a pipe burst in their bathroom. The leasee on the second floor was in Spain for a month, so the first sign of trouble for Qlue was when the maintenance tech for the complex discovered the leak and, knowing there were a lot of computers in the rooms directly below, ran into the office, yelled that there was a flood and to shut everything down.

The company was in the middle of restoring their computers from a lightning strike earlier in the week and had their backup loading from external media. Acting quickly, one employee hit the main power breaker - which cut power for a moment, until the triple-redundancy power supplies kicked in and supplied power to the office. This happened just as water began streaming in from the ceiling, causing arcing and major damage to most of the company's computer lab.

In moments, they'd lost weeks of data, hundreds of thousands of dollars of electrical equipment and similar assets. The insurance company couldn't understand that it had taken years to find aging systems to test the software on and wanted to simply replace the old machinery with newer, less expensive equipment. The company's CTO had to spend a lot of time tracking down replacements for the aging equipment.

Though the company did eventually recover from this disaster, it took months of back and forth with the insurance company to finish recovering the entire loss the company faced during the disaster, time that the company could have invested into growth instead. Valuing a software company is vital to your business' bottom line, especially when dealing with insurance claims, securing financing for expansion, selling or buying a company or many other situations. 

Tags: valuing a software company

What exactly is involved in valuing a gym?

Posted by Business Valuation Specialists LLC on Jun 13, 2018 9:57:00 AM

When you own a gym or fitness center, your business can be very different than other companies in your area. One area where there can be some marked differences is in how to handle valuing a gym and what's involved in the process. Fortunately, it's not as different as you may think, with a range of factors coming into play to determine your fitness center's actual value. This value can then be leveraged for financing, tax reasons, legal issues and insurance claims to ensure that you're getting what your gym is worth, no matter your situation. Here's a quick look at what's involved in the process.

What exactly is involved in valuing a gym?

Gyms tend to fall into an interesting area in terms of valuation. They tend to carry some amount of goodwill, where the reputation your business has built up over the years must be taken into account. There is a certain amount of assets involved in terms of the property and equipment that is used by patrons. Income is another part of the equation that needs to be accounted for, especially if services are a large amount of that income in terms of personal trainer fees and similar expenses. 

Often times, a multiple of income is used to help gain a ballpark figure, with goodwill and assets figured in to help determine the overall value. Generally speaking, the higher the amount of income per year, the higher the multiple will be to determine that ballpark figure. As with similar industries, the appraiser will need to compare your fitness center to a number of similar enterprises that have sold recently, helping them to determine market demand and current prices. But that's not necessarily the only thing they'll look at.

In many industries, the reason why the appraisal is needed is vital to finding the right value. Why? Imagine that you've run a gym for four decades. If it needs to be sold, there are many factors that will impact the final price. Is it being sold quickly to distribute among the heirs to an estate because the owner has passed away? If so, the business value may be much lower than if the owner is slowly looking at retirement and is willing to wait for the perfect buyer to make the sale.

Is the business going to be sold in its current condition to a buyer who will continue to operate it? If so, it will probably command a higher price than selling off the equipment assets, which will often sell for less due to the cost of removing that equipment from the gym and installing it in a new location. Speaking of equipment, what shape is the gym in? You can often use an initial valuation to improve the condition of your business prior to offering it for sale. Old or worn equipment will have a lower value than well-maintained machinery that is ready to use.

Though fitness centers may have a great deal that is different than other companies, the process of valuing a gym isn't that different, provided that you're working with the right people. Make sure before you hire a business valuation specialist that they are certified with experience in the fitness industry. This helps to ensure that they have the expertise to determine exactly how your company is similar to or different than other fitness centers in your area. 

Tags: valuing a gym

How is valuing a franchise different than other business valuations?

Posted by Business Valuation Specialists LLC on Jun 6, 2018 1:36:00 PM

When you're running a franchise, there are a number of differences compared to most other businesses. Marketing processes, business organization, equipment choices, communications and more are all different when your business is based on a franchise model. One area where there is a strong difference between franchises and other businesses is the process involved in valuing a franchise. Here's a quick overview of some of the differences when a business that is being appraised is a franchise.

How is valuing a franchise different than other business valuations?

One new and unique area where many franchises are seeing changes compared to in the past is that many companies are becoming more polarized with hot issues. Because a franchise's value is partially based on public goodwill and view of all franchises in that company's franchisor, a popular or unpopular issue stance can impact goodwill and intangible assets much more strongly than in the past. This can even impact your company's bottom line when another franchise owner takes a strong stance on an issue which then impacts your business, whether you share that stance or not.

Franchises also tend to have a more narrow approach to valuation. Why? Franchisors, or the umbrella company under which all the franchise owners are operating, have more rights in a franchise than you would see in other companies. A common reason for a business owner to get a business valuation is because they're getting ready to sell a business. In many franchises, the franchisor can bar the sale of the business to a third party or may require their approval of that third party before the sale can take place. 

However, that still leaves a wide range of reasons why a franchise is valued, including divorce, estate planning, tax planning and similar concerns. The intangible assets of a business can be defined as the difference between what a business sells for and the actual dollar value of its balance sheet. But when you're dealing with a franchise, there's some give and take as to whether the difference between those values belongs to the franchise business owner and the franchisor, who often provides a wide range of services depending on the franchise agreement.

This means that the business appraiser who is appraising a franchise must start the process by carefully studying the franchise agreement. This provides valuable guidance to determine exactly how intangible assets should be distributed between the franchisee and the franchisor. Is the difference in value caused by the franchisee's hiring of superior employees, better customer service or similar benefits to his customers? Or is it caused because the franchisor has dedicated significant resources to help drive more customers to the franchisee's specific business through a range of marketing plans, referrals and branding through initiatives pushed at the franchise headquarters?

Franchises provide a number of unique opportunities, but they also have a wide range of differences when compared to other businesses, and the process of valuing a franchise is different from the processes used for other types of businesses for this reason. The most important step to take when having your franchised appraised is working with a certified business valuation specialist who has specific experience in working with determining the value of franchise businesses. The certification process ensures that the appraiser will know exactly which approach to take no matter what industry your franchise operates in.

Tags: valuing a franchise

What's different when you're valuing a restaurant?

Posted by Business Valuation Specialists LLC on May 31, 2018 1:25:03 PM

A business valuation can be a complicated process, but even when you understand the entire process, there is a wide range of differences depending on the particular industry your business falls into. This is especially true when valuing a restaurant, which can have many differences in even very similar enterprises. Here's a quick look at how restaurant valuation is different than other types of businesses.

 

What's different when you're valuing a restaurant?

Restaurants have a wide range of different factors that can impact its value. Is it a diner, a fine-dining establishment or a themed eatery? Where is it located and what kind of clientele does it draw? Have you developed a strong following because of a specific type of cuisine, fresh approach or community outreach? All these factors can impact your restaurant's value.

Most restaurants have an assortment of fairly standard pieces: tables, chairs, dishes, trays, ovens, stovetops, refrigerators, chopping blocks, sinks and decor. Though the quality and number of these items will vary based on the size of the business and the type of cuisine being served there, the value of this equipment is pretty close to even across the board. Where restaurants really tend to have different values is when community goodwill and average income are brought into account.

A small mom and pop diner may serve a couple dozen groups over the course of the day, not turning over a great profit but not having much in terms of expenses either. A specialty restaurant featuring locally-produced foods and specialty fare in a vacation area may have constant wait times during the tourist season, but just a few customers a day during the rest of the year. A high-end fine cuisine restaurant may draw plenty of attention with their specialty chef, but may lose income and business when that chef leaves the business for other opportunities.

Does your restaurant always support whatever youth sports, academic group or arts organization needs help at the time? That sponsorship often leads to additional income from family members of students or arts patrons which would otherwise be unavailable. Is it popular because Sal has been slinging top-notch burgers for the past 20 years and customers have come to expect that familiarity from the cook? If so, changing owners may cause a drop in business as customers realize that their familiar friend is no longer running the show.

These types of added business can be hard to value, but are an essential part of the business' bottom line. This is one of the many reasons a restaurant owner should always use a certified business valuation specialist when trying to determine the value of their business. A certified appraiser has the knowledge and experience to properly value a restaurant business, with all of its unique facets and factors that can impact its value. They know how to determine the value of goodwill and community support, as well as value of every specific facet of your restaurant's assets and income.

By understanding the process of valuing a restaurant, you can gain a better grasp of how different decisions you make can impact your business' bottom line. Take time to carefully go over your valuation report, and make sure to ask about any calculations you're not certain about so that you can get every possible dollar of profit and productivity out of your equity.

Tags: valuing a restaurant

How does a business valuation certification provide you with a better appraisal?

Posted by Business Valuation Specialists LLC on May 1, 2018 3:07:00 PM

When you need to have your company appraised, business valuation certification can be the furthest thing from your mind. However, it's a very important thing to check before you hire a business appraisal to ensure that the appraisal they provide you with will meet particular standards and hold up to strong scrutiny in a wide range of circumstances. But beyond that, why will using a certified business valuation process help provide your company with strong benefits? Here's a quick look to help get you started.

How does a business valuation certification provide you with a better appraisal?

When you make sure that you use a certified appraisal process, it helps ensure that the final value is accurate and calculated based on solid facts. During the process, a trained, experienced appraisal professional takes the time to study a wide range of aspects about your company, industry and market. This ensures that the value that is calculated for the appraisal report takes all reasonable aspects of the company's value into account. 

For example, if your company has been having strong growth, but is not remaining innovative within your industry or the market is failing rapidly, that will impact your company's overall value. An excellent example of this is the changes that oil companies have seen over the past few years. Petroleum-based companies can quickly go from running at a profit to running in the red as oil prices shift on the market. When prices drop and the industry slows down, a company that had a great value during boom times may suddenly find itself virtually worthless.

Fortunately, the depth of information and insight available in a business valuation can provide you with the tools you need to help bring your company through troubled waters successfully. It helps you improve the value of your business so that if you're working on an exit strategy, you can maximize your profit from the sale or transfer of your company. But exactly how do you take advantage of the information in the valuation report?

Because a valuation looks at your company as well as the competition, the report may mention where your business is different, both for good as well as for bad. It can look at the state of your equipment and determine whether you're going to need to replace that machinery in the near future or whether it will perform well for new owners for years to come. It determines the value of your reputation in the community, your innovative processes and the strength of your brand.

It can also look at your internal situation. If you have areas where you're increasing your overhead and lowering profitability, learning about those areas from a valuation report gives you the opportunity to make changes to those aspects. This can very quickly increase your profitability and cut your expenses, making it much easier to quickly make gains on your final sale price.

By using business valuation certification when having your company appraised, you can rest assured that the money you spend on the appraisal will be well invested. A certified appraisal ensures that the valuation will hold up well to strong scrutiny and will have accurate information on a wide range of potential issues for your business. This means you can depend on it when making important decisions about your company both now and in the future. 

Tags: business valuation certification

What are the small business valuation methods and how are they different?

Posted by Business Valuation Specialists LLC on Apr 25, 2018 1:41:00 PM

When you're considering having your company appraised, one thing that may not have come to mind yet are the different small business valuation methods. But what are they, how are they different and which one should be applied to your particular situation? Here's a quick overview of the most common methods used and how they're applied to your company's situation.

What are the small business valuation methods and how are they different?

There are three primary approaches to small business valuation: asset, income and market based. However, there are a number of different methods under each approach.

Asset-Based Approaches

Generally speaking, asset-based approaches don't work well for companies that are running in the black, but may be used in companies that are failing.

Adjusted Net Asset Value: This requires the appraiser adjust the company's assets and liabilities to fair market value.

Liquidation Value: When a company discontinues operations or restructures, the proceeds are calculated using the premise of an orderly or forced liquidation.

Book Value : Though it's sometimes used, this method has some flaws. It's based on accounting figures but often doesn't reflect the asset's actual value due to depreciation schedules.

Excess Earnings: This method combines asset and income based approaches by calculating earnings to measure intangible business assets as an extension or multiplier above a reasonable asset value.

Income-Based Approaches

An income-based approach has two methods depending on whether income is steady or inconsistent. The company's income over a period of time is multiplied to determine its overall value.

Capitalization of Earnings: When a steady income is the norm for a business, this method uses adjustments to normalize the income stream of a business for a single period, and then multiplies that benefit over a longer period of time.

Discounted Earnings: Also referred to as discounted cash flow, this takes an inconsistent or irregular income for a company and converts it to determine the current value of future income benefits for that company.

Market-Based Approaches

This type of approach uses current market conditions to determine the value of a business, whether based on income, a similar business or overall transactions.

Guideline Public Company: A similar publicly-traded company allows the appraiser uses the price investors paid for minority interests in that company and adjusts it to match the private company that's being appraised.

Guideline Company Transactions: A similar company that's closely held is used as a basis for the appraised company, with transactions analyzed and adjusted to match the appraised company.

Multiple of Discretionary Earnings: Financial statements from small companies are adjusted to represent an owner-operator. It compares adjusted earnings to create a valuation multiple.

Gross Revenue Multiple: This uses a comparable company and divides transaction price by that company's revenue to create a multiple of gross revenue.

By having a better understanding of small business valuation methods, you can gain an appreciation of what exactly your business appraisal means, how it was calculated and in what situations it may or may not apply. However, the appraisal you receive and work from is only as good as the appraiser who calculates it and prepares the report. Make sure that the appraiser you use has a solid certification in business appraisal as well as experience in your industry before hiring them for the job.

Tags: small business valuation methods

What's required to become a CVA and why does it matter?

Posted by Business Valuation Specialists LLC on Apr 18, 2018 11:40:00 AM

When you're getting ready for a business valuation, it's important that you hire the right professional for the job. A Certified Valuation Analyst (CVA) has had extensive training to receive their certification, which prepares them for a wide range of valuation situations. This means they know exactly what needs to happen to calculate an accurate valuation of your company. Here's a quick look into what's involved in the certification process and why it matters to your company's valuation.

What's required to become a CVA and why does it matter?

Certified Valuation Analyst Qualifications

To be qualified as a Certified Valuation Analyst, there are certain standards that must be met. If the appraiser is not a CPA, a business degree is required from an accredited educational institution. A minimum of two years of full-time experience in business valuations, significant enough contributions to be listed on 10 or more valuation reports or demonstrating substantial knowledge of business valuation theory, methodologies and practices is required. A sample case study or actual Fair Market Value valuation report will need to have been prepared within the past year and must be submitted for peer review. Attendance at an optional 5-day training program is recommended, but not required. Three personal and three business references are required, as is passing a comprehensive 5-hour multiple-choice/true-false proctored exam. Finally, an application must be completed and submitted with the required paperwork. After applying for the Certified Valuation Analyst designation, they'll need to pay a fee or apply for NACVA membership, complete required continuing education coursework and meet the Tri-Annual Certification requirements to maintain the designation.

Benefits of using a Certified Valuation Analyst

Obviously, becoming a Certified Valuation Analyst is a lot of work, so why should you hire one to perform your business valuation? The amount of education that is required ensures that the analyst has a great deal of knowledge about accounting and appraisal, giving them the tools they need to get the job done right the first time. Because they've been through such an extensive educational process with a required experience component, the calculations they perform and the methodologies they use in determining business value ensures that your business valuation report will reflect a very accurate value for your company. The continuing education portion means that the analyst will be staying up to date with the latest changes in appraisal theory and practice.

All of these aspects come together in an appraisal professional who is able to develop the right approach to your situation, calculate your company's value based on proven methodologies and is able to back up those methodologies with proven facts as the methodologies used have been tested time and again in a wide range of circumstances. This helps ensure that your valuation report will hold up in legal, insurance, financial and tax circles.

As you can see, the process of becoming a Certified Valuation Analyst is complex and involved, but it produces valuation specialists who can deliver an exacting valuation of your company adapted to your current circumstances. Though you have options in how your business is valued, a CVA is the best way to ensure that those values are accurate and will hold up well to strong scrutiny in a wide range of situations. Using a certified valuation specialist provides you with the best value for your money.

Tags: CVA

What do you need to know about how to sell a business?

Posted by Business Valuation Specialists LLC on Apr 11, 2018 4:03:00 PM

When you started your business, you probably didn't think about what would happen when you were ready to sell. It's easy to get caught up in the daily operations of your business and your long-term goals. But when it's time to look at an exit strategy and consider selling, do you know how to sell a business? Here's some practical advice on how to start the process.

What do you need to know about how to sell a business?

When you're first considering selling your business, you should start by taking a look at your motives. As with most business transactions, you'll want to sell while the market is stable or growing to ensure you get a better price and faster sale. However, it's also important to start the process far enough in advance to ensure the best possible sale at the end of the process. Generally speaking, it takes between two and four years to prepare a business for sale.

One of the first steps you should always take in preparing a business for sale is having a business valuation performed. A business valuation looks at the entirety of your business operations as well as outside factors, such as market conditions and competitors. It provides you with a baseline value for your business, but it's the intel that you can gain that is truly valuable. The level of detail that is reached makes it a great tool for improving your company's financial picture. If it shows problems with your production line, you now know where it can be improved. If it shows issues with bad debts in your accounts receivable department, you can pursue different strategies to close out those accounts successfully.

Once you've started to make improvements, you can start to decide how to pursue the sale of the business. You have a couple options available, either selling it through a broker or going it on your own. A broker will take some portion of the sale price, typically a commission on the sale, but already has a good idea of how the process works, which outlets will provide you with the best outcomes and how to move the process along when it's needed. At the same time, you can focus on getting your business ready for sale rather than trying to sell it yourself. However, if you have the free time or may know prospective buyers in your field, you may want to consider handling the process on your own to avoid having to pay fees to the agent or broker.

However, one area where you won't want to skimp is in document preparation. With the many different laws and regulations varying from location to location and industry to industry, hiring an attorney to handle the paperwork ensures that your interests are protected and that no mistakes are made in the process.

Knowing how to sell a business isn't the first thing on every entrepreneur's to-do list, but it is an important piece of knowledge to have. By knowing when it's time to get out, you can make a more successful ending for your ownership in your company and receive a better asking price during negotiations with a prospective new owner. Even if you're not ready to sell yet, considering the steps involved can help ensure your business is growing at its best potential.

Tags: selling a business, how to sell a business

Why should you insist on working with a certified business valuation appraiser?

Posted by Business Valuation Specialists LLC on Apr 4, 2018 2:29:00 PM

Though there are many reasons why you should have your business valued, working with the right business valuation appraiser is vital to making sure you get accurate results. One of the most important factors to investigate before you hire is whether the appraiser is certified. But why is the certification process important and how can it impact what you get out of your appraisal? Here's a quick look at why you should insist on only working with a certified business valuation specialist.

Why should you insist on working with a certified business valuation appraiser?

Let's look at a couple situations. A business needs to determine the value of their company and has a few options before them. In the first, the business gets an idea of what the company will be worth on the open market based on the determination of a real estate agent. It costs the business virtually nothing beyond a bit of time to get the appraisal completed. However, the final valuation may be based too strongly on the realtor's goals. But how do those goals impact the final value?

The realtor may be short of funds due to slow sales, and therefore suggest a price that is lower than may be reasonable due to needing a fast sale. Perhaps they're flush with cash and want to wait for the perfect buyer for a high commission down the road, regardless of how quickly you want to sell the business. They may not be familiar with the exact nature of your business, so they make a guess based on what little they do know without carefully considering the impact it may have on your bottom line.

Now imagine that the business hires a certified business appraiser. The certification process means that the appraiser hired can look at the exact situation for which the appraisal is needed. If a company needs to determine the value of a business for reasons other than a sale, the realtor's approach can be completely inappropriate. What if a business owner needs to make improvements? Many companies use business appraisals as a starting point to improve profitability and efficiency throughout its operations. Perhaps the business will be changing hands to the next generation and the current owner needs to know what their legacy is worth so they can decide how much of that value is a gift and how much will be needed for their retirement.

What if there's a divorce or lawsuit at hand that requires the business value to be disclosed as part of the proceedings? In many legal situations, the appraiser is required to use a particular methodology to generate the business' value for the court. A simple appraisal or guess at a value by a realtor won't hold up to that level of scrutiny.

It can be really tempting to try to save a few bucks by simply going with someone who doesn't have a certification, it's simply not worth the risk to your company and the problems associated with trying to work with a bad appraisal. By insisting on only working with a certified business valuation appraiser, you can ensure that your business' interests are protected in any number of situations. Fortunately, finding a certified appraiser is a fairly simple process, so make sure when you start looking at appraisers for your business needs.

Tags: business valuation appraiser

What exactly happens during a private company valuation?

Posted by Business Valuation Specialists LLC on Mar 28, 2018 9:37:00 AM

When you're trying to determine the overall value of your business, a private company valuation can go a long way towards figuring out that value. But what happens during the process? How are valuations for private companies different than those for other businesses? Here's a quick look at the overall process and how the different factors and methods can impact your company's calculated appraisal.

What exactly happens during a private company valuation?

When private companies are valued, there are a number of approaches that can be used. For most successful businesses, income or market approaches are typically used to give you the most accurate value for your company. When market approaches are used, the private company is often compared to a similar public company, with adjustments made to the private company's value to make it match the public company as closely as possible.

However, there are still several different approaches even within the data that was available. Here's a quick look at the four main types of methods used when market approaches are used:

  • Guideline Public Company Method - When this type of valuation method is used for private companies, the financial data that is freely available from publicly traded businesses is used. The actual price that investors choose to pay for the minority interests in public companies is used as the basis for the valuation. The public businesses that are used to help determine private business values are typically in the very same or in a similar business as the private business.
  • Guideline Company Transactions Method - When companies that are in a same or similar line of business as the company that is being valued, but it is closely held and not often traded on the open market, this method is used to determine private company value. Generally speaking, both companies will have several similar characteristics. This can include the sector, the business size, the products and services offered and the location where it does business. The transactions of the publicly held company will be used to determine the transaction value of the private company, with more weight given to more recent transactions.
  • Multiple of Discretionary Earnings Method - When a company is just too small for the guideline company transactions method to be used, this method works well. Smaller public companies can have their financial statements adjusted to reflect a private company. It compares public company adjusted earnings into the discretionary earnings to determine transaction value, creating a multiple for the private company's earnings.
  • Gross Revenue Multiple Method - Another method used for smaller businesses, this takes the company's revenue divided by the transaction prices. This allows the appraiser to develop a gross revenue multiple, which is multiplied into the private company's revenue to determine the value. Unfortunately, this method doesn't look at factors such as whether both businesses are profitable, unprofitable or on the same level of profitability.

By understanding how a private company valuation happens, it becomes much easier to understand how your company's value is calculated. It also allows you to see how you can change those numbers by adapting your business practices to the insights you've obtained from the appraisal report. This helps you improve your company's value in the long run and can help maximize the return on your investment when it's time to make an exit strategy.

Tags: private company valuation