Business Valuation Blog | Understanding Buying / Selling a Company

Selling Services: What's involved in valuing a consulting firm?

Posted by Business Valuation Specialists LLC on Jul 18, 2018 3:06:00 PM

When your business is based on the expertise, experience and services you've developed over the years, how do you put a value on it? Valuing a consulting firm can be vastly different than valuing other types of businesses. What is involved in the process of having your consulting business valued? What should you expect in the process? How is it different than how other businesses are valued? Here's a quick look into the entire process and why it uses different methodologies than those used for other types of businesses.

 

Selling Services: What's involved in valuing a consulting firm?

When a regular business is sold, the asking price or value is typically based on a complex series of calculations based on assets, liabilities, income and other aspects of that business. Machinery, real estate, market conditions, future income, goodwill and reputation all come into play when the business is valued. However, that process doesn't work as well when a consulting company is being valued.

Generally speaking, a consulting company has a much higher level of intangible assets. These assets can include expertise in the field, experience in the industry or specialty services that are hard to put a dollar figure on. What's the value of an hour of your time? For many people in consulting companies, it goes far beyond an hourly wage. It includes a significant amount of overhead, especially time spent in forming network connections, marketing the business and developing new programs for their clients.

In other industries that sell services, you can often estimate the value based on what other professionals in the area or industry are charging for their services. A lawyer, accountant or dentist are all able to charge a particular amount based on what the market will bear and what their overall expenses are. But when you're selling less common consulting services, determining and proving that value can be much more difficult. How do you prove the value of your consulting business when it matters the most?

Let's say a consulting partnership exists that provides evaluations of workplace safety. If one of the partners has a health issue that forces them to leave the business, how do you determine the value of that partner's share? When a business valuation specialist looks at the situation, they use a number of different methodologies to help calculate that value. They may look at the income that particular partner has brought into the business, and made adjustments based on that partner's contributions to the business, such as unconventional thinking, a reputation for driving innovations, goodwill in the community that has brought in more business and similar areas of concern.

By understanding the differences between valuing a consulting firm and valuing other types of businesses, you can get a better grasp of how the entire process works. This will help you make wise business decisions that will boost your business' equity, allowing you to grow into the future and reach your dreams. But don't settle for an average real estate agent who doesn't understand the complexities of your business or make a guess based on what similar businesses have sold for in the past. Make sure that your business is appraised by a certified business valuation specialist to ensure that you're getting a solid, accurate value for your hard work.

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More Than Tools and Knuckle Busting: Valuing an Auto Repair Shop

Posted by Business Valuation Specialists LLC on Jul 11, 2018 11:08:00 AM

When you own or are considering buying a repair shop, it's important to know the value of your business. But how is that value determined? Beyond simple calculations of tools, supplies and real estate, there are a wide range of factors that tie into your shop's overall value. Here's a quick look at why valuing an auto repair shop is vital to your business' bottom line and may reveal additional value you may not have counted on when making financial decisions for your company.

More Than Tools and Knuckle Busting: Valuing an Auto Repair Shop

What's your shop worth? It's an easy question, but the answer is much more complicated. You have the value of your assets, typically to include your tools, office equipment, materials and property. However, it took a lot more than a few things to build your business. Shouldn't that be compensated? Whether you're selling your business, need a loan to expand your operation or just want to get an idea of what it's worth, you need to include all aspects of your business, not just the material assets you've purchased over the years.

What about the work you've done to establish your shop as a leader in your area? How do you value the training and certifications you've worked towards to improve the service and quality you deliver to your customers? Have you donated time, materials or financial assistance to organizations in your area that has built goodwill in the community? Do you deliver superior customer service or better outcomes for your customers? These are all important areas of your business and they should be recognized as part of your business' overall value.

The income you've built over the years didn't come easily for your business, and it shouldn't be discounted in the valuation process. A new shop may have to work several years to gain the level of income you've achieved. Should you simply throw that away when selling to a new owner? Absolutely not! The new owner will gain income over starting a new shop because they'll benefit from your customer base and reputation in the community, so you should be compensated for that improvement in their situation.

What about the specialty services you provide that no one else in your area can manage half as well? If you've spent time perfecting your diesel mechanics or focused on revitalizing aging hybrid electric cars, that expertise deserves compensation. What about a new owner? If you're staying on board to help them learn the ropes of your specialty, isn't that worth something extra, considering the new owner will probably benefit from the higher rates you've charged for your expertise over the years? Don't shortchange the progress you've made in special areas of mechanics and repair work. 

By taking the time for valuing an auto repair shop, you can rest assured that your business' overall value is being considered rather than the simple sum of all of its parts. But when you do have a business valuation performed on your repair shop, make sure that you work with a certified business valuation specialist who has experience in your industry. By doing so, you'll receive a valuation report that will stand up to strong scrutiny, whether you're dealing with the tax office, insurance company, financial institution or the court system.

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What are Some of the Differences When Valuing a Wholesaler?

Posted by Business Valuation Specialists LLC on Jul 5, 2018 2:13:00 PM

When you work in the wholesale industry, your business has significant differences than other businesses. You're not tied up in manufacturing, nor do you spend time marketing to the general public, so your marketing, sales and distribution process is much different. But when it comes to valuing a wholesaler, which differences are important in the valuation process and how does it impact your final business value? Here's a quick overview of how wholesale businesses are different than other industries when it comes to business appraisal.

What are Some of the Differences When Valuing a Wholesaler?

Let's start by defining a wholesaler. Retailers purchase material or products from wholesalers to sell to their customers, which results in a significant amount of their assets tied up in products and store fixtures or shipping materials and equipment. Manufacturers produce the materials or products, so they have a good amount of their assets tied up in manufacturing equipment that is specialized to their particular products. Logistics providers have a lot of their assets tied up in trucks, trailers and shipping materials.

Wholesalers, on the other hand, receive items shipped from the manufacturer to them through a logistics provider and then sells that material or product to a retailer, shipping through another logistics provider. They typically purchase the materials or products at a reduced rate and much higher quantity from the manufacturer, then sells the products at somewhat lower quantities and higher rates to the retailer. This means that much of the assets wholesale businesses have are tied up in stock and warehousing assets such as buildings, material handling equipment and similar areas of concern.

But what type of other factors can impact a wholesale company's bottom line? One area of consideration is the age of the business. A new wholesale company may not have enough expertise to do well against more established competitors. Why? Though many companies have gone to using the internet to find their customers or suppliers, many wholesale companies are still somewhat relationship based. It's a matter of who your customers know and who they want to do business with. This can make it a difficult business to break into if you don't have a lot of contacts at the inception of your business.

What about established wholesale companies? In this situation, there are still some factors that can impact business values. Is the company adapting its stock to meet changes in demand, such as adding components that work well in Internet of Things or smart home situations? Has the company digitized to meet new challenges, demands and opportunities in the market? Does it have any serious competition or is it still a stand-alone supplier in the industry? By knowing the answers to these questions, the business appraiser can calculate an accurate value for the company.

A wholesale business is very different than other companies that are involved in the sales and distribution process, so valuing a wholesaler is also a different process than other industries. For that reason, it's vital that you select a business appraiser be certified so that they have the knowledge needed to properly calculate the value of your company, as well as having experience in the industry so that they understand the factors that make your business different from others in the retail sales supply chain.

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What happens when an appraiser is valuing an online retailer?

Posted by Business Valuation Specialists LLC on Jun 27, 2018 10:23:00 AM

When you work in ecommerce, determining the value of your business can be a difficult proposition. Because the industry is still relatively new, it doesn't have decades or centuries of processes already available, making it more difficult to determine. But valuing an online retailer isn't impossible. It does require a particular skillset, methodology and approach that is unique to that industry. One of the most common questions we receive from clients in all industries is what happens during the appraisal process. Here's a quick look at how the process works when an appraiser is determining the value of an online retailer.

 

What happens when an appraiser is valuing an online retailer?

Businesses that engage in ecommerce have their own unique set of challenges when it comes to determining value. To start, there are any number of different setups for this type of business, from someone's garage-based business selling second-hand clothing to megasites like Amazon or eBay. The business may be strictly website based only, may have a hybrid model that sells both at brick and mortar stores as well as online, or could be just entering into ecommerce after many successful years as a business that has functioned only as a brick and mortar store. It may sell items that are kept in physical stock at a location owned by that business or may use third-party logistics and drop shipments to provide material goods to their customers, or may not provide any physical goods at all, providing ebooks, music or other media electronically.

To account for all these differences requires a specific approach, as does the reason for the appraisal. In some situations, such as legal proceedings, a specific methodology is required to determine value that will hold up in court. The appraiser will often take a look at the company's assets when there is significant value tied up in stock and digital equipment. The value of the company's branding and digital presence will be taken into account, which are often considered to be intangible assets. Business income and growth are also strongly considered, especially when a business sells digital media or services that may not be counted the same way that physical stock may be.

The business valuation specialist will also consider the market and your business' place in the industry. Does your business have a reputation for innovation or is it just one of many in the market that meets the same basic needs? Do you offer exceptional customer service, free shipping, free returns or other aspects that improves your company in the eyes of your customers and builds loyalty to your business? Are you focused on serving a specific industry or the general public? All these aspects will impact your business value.

By having a solid grasp of how the process of valuing an online retailer works, you can ensure that the appraiser you're working with is doing a great job at calculating your business value. One of the best ways to make sure you're working with a good appraiser who will provide you with a solid valuation report is to check whether they're certified and have experience in online retail. The certification process ensures that they have received the education needed to select the appropriate calculation methodology for not only your industry, but also your specific situation. 

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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. 

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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. 

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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.

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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.

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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. 

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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