Business Valuation Blog | Understanding Buying / Selling a Company

What appraisal methods are best for valuing a small business?

Posted by Business Valuation Specialists LLC on Jun 28, 2017 11:33:00 AM

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You've worked hard to grow your small business, and now you want to sell it and reap the rewards. To do this, you'll need a business valuation expert who understands the best ways to value a small business like yours. When it comes to valuing a small business, some appraisal methods work better than others. Get our recommendations to understand your best options for obtaining a fair market valuation in anticipation of selling your company. 

Which Appraisal Methods to Use When Valuing a Small Business

These methods provide accurate, timely valuations for small businesses. They are flexible, fair, and easy to understand: 

  • Earnings multiplier method - This income-based valuation method works well for robust small businesses that will be sold on the open market. In this approach, the small business appraiser takes a multiple of the company's earnings potential, which can then be used to determine a business value or asking price. This approach is transparent, tangible, and easy for both buyers and sellers to grasp.
  • Discounted cash flow - This method often makes sense when small businesses experience inconsistent earnings over time. If your small firm oscillates between peak years and lean years, a discounted cash flow appraisal can help even things out, thus capturing a fair value. In this method, all future earnings are translated into present value to determine a small business valuation. 
  • Market-based - A small business in a unique or growing industry can benefit from a market-based evaluation. This is frequently true when an industry has under performed in the past, but is revitalizing or enjoys a promising forecast for the future. In this situation, past earnings may not reflect the accurate future earnings potential of the business. By contextualizing the small business value in market terms and comparing the company to comparable firms that have sold recently, a business appraiser can accurately capture the business's fair market value for buyers and sellers alike. 
     

Which Appraisal Methods to Avoid When Valuing a Small Business

It is generally ill advised for small businesses to use the following business valuation method: 

  • Asset-based valuation - While an asset-based valuation may seem like an effective way to measure a small business's worth, it is rarely recommended. This process can oversimplify things. One exception to this rule is for liquidation purposes. If your business is closing, or if you are filing for bankruptcy, an asset-based valuation may be the right choice.

While there are exceptions to every rule, ask your appraiser to explain why they would recommend moving forward with this approach. In general, an appraiser should be able to sit down with you before the appraisal, explain the process, and answer any questions you have about what to expect from the process. A good appraiser wants to provide you with useful and unbiased information that will help you with your next steps. 

To create the most leverage for yourself, start planning your small business appraisal at least a year before you want to sell the company. This way, you'll be able to make smart decisions in planning for the sale, envisioning your future, and leaving the company you've worked so hard to build in good hands. 

Tags: valuing a small business

How Factors can Impact the Valuing an IT Company

Posted by Business Valuation Specialists LLC on Jun 21, 2017 2:09:00 PM

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When you're running a business in the tech industry, valuing an IT company can seem like a very confusing process. What factors can impact the value of your business and how can you improve the valuation multiple? In this post, we'll take a quick look at how industry giant Apple's relatively low valuation multiples and how those insights can be used to improve your privately-held IT business' valuation multiples.

How Factors can Impact the Valuing an IT Company

When you think of the quintessential successful IT company, Apple is certainly one of the first to come to mind. From Steve Jobs' brilliant ingenuity to the popularity of the iOS system, it's a great example of American entrepreneurship. But despite this position in the industry, Apple's valuation multiples are still relatively low. Why?

Even though Apple has shown solid earnings well above projections for the first quarter of 2017, its market share is strongly based on a single product, the iPhone, at nearly 70% of revenues. Though the company launched a couple new products around the holidays, neither newcomer performed nearly as well as Apple's flagship device. If a new version has problems, such as Samsung's Note 7 series or removes popular features such as the iPhone's loss of a headphone jack in the last version, it can cause serious problems with profitability and reduce the company's overall valuation multiple due to this perceived risk. Even with $100 billion in sales every quarter, the company's valuation multiple is only trading at 15.3 times earnings and 3.2 times sales, which is very low for such an otherwise successful company.

Much like large companies like Apple, small, privately-owned companies are often appraised using valuation multiples. Imagine that you had a single very popular flagship product or service that was the baseline for most of your profitability. What happens when the new version of that product doesn't capture the public's interest? What about when there's a safety recall on that product? Much like Apple, your company would have a lower valuation multiple than you might expect.

Branching out into other products or services, or taking the time to expand other offerings or new approaches to your products can help ensure that your company remains profitable and with a higher valuation multiple. Another approach is to use a business valuation to determine areas of strength or weakness in your company. This allows you to address these issues and improve your overall business valuation multiple by making a more robust tech business. There's no doubt that there are regular shifts in the tech industry that can sink or float a business. Knowing where your business stands can make all the difference in what happens to your company in these situations.

By having a good grasp of what factors impact valuing an IT company, you can set your business up for a more successful future.

Tags: valuing an IT company, IT company valuation

Industry Growth: How valuing a construction company helps you compete

Posted by Business Valuation Specialists LLC on Jun 14, 2017 10:12:00 AM

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Though construction can often be a boom or bust business, the current outlook for construction nationally and internationally is looking very promising. Are you ready to take advantage of this growth by growing your company? Valuing a construction company is often a task left for selling a business or merging with another company, but by using a valuation report as a tool for business improvement and growth, you can see phenomenal opportunities during this next upturn. Here's a look at some statistics around the world and how a business valuation helps you take advantage of the next boom cycle.

Industry Growth: How valuing a construction company helps you compete

Recent projections by Markets and Markets is predicting a 7% compounded rate of growth per year until 2021 in the international construction industry. That's a change from $121 billion in 2015 to an astounding $180 billion by 2021. Why this big change? Governments are shaking off the dust of the recession and investing in infrastructure again. Developing countries are building as the standard of living rises. Businesses are investing in future growth as they see rapid changes in the market.

But where is your construction company during this boom cycle? When you get a business valuation, you're doing more than just determining your company's sale price or buyout value. A business valuation report starts by looking at your company overall. Do you have a good cash flow, or do you have longer than average accounts receivables or bad debt? Is your equipment in good condition or will it need replacing soon? Are you a leader in your sector of construction for your region or is your business just one of a dozen mom and pop operations in the area? By knowing where you stand, you can figure out where you need to make changes to improve your business overall.

Where does your competition stand? A good business appraiser will take into account goodwill in your community and the value of a solid reputation. Are you the go-to commercial electrical contractor in your area or are you known for rock bottom prices that aren't paying your bills? Knowing where your business stands in the community makes a big difference in how it will perform during both boom and bust cycles.

Let's not forget the market. With the market as strong as it is, how will you best benefit from this cycle? A business appraiser will consider the value of your company based on upcoming projections, which means what your company was worth during the worst of the recession may be much lower than it is worth going into a boom cycle. Wouldn't you like to take that extra value and equity and be able to roll it into growth for your company?

As you can see, there's a lot of opportunity beginning to open up in construction, but only if you're in the right position to take advantage of it. Valuing a construction company provides you with the details you need to make wise decisions for your business and ensure that you won't be taking unnecessary risks during this boom cycle.

Tags: construction company value, valuing a construction company

Ready to sell? How valuing a restaurant gets you the right price

Posted by Business Valuation Specialists LLC on Jun 7, 2017 3:02:00 PM

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When you're in the restaurant business, it can seem as though your hard work doesn't always amount to much. But how much should you get for your hard work when it's time to sell your business? One option that will provide you with both a solid price and insights into how to improve that figure can be found when valuing a restaurant. Here's how it helps you get ahead.

Ready to sell? How valuing a restaurant gets you the right price

When you're trying to determine a fair selling price for your restaurant, it can be really tough. Should you base your price on a restaurant that just sold in a neighboring town? Should you try to talk to a real estate agent to figure out a price? Should you just add up the assets you have and ask for that as your asking price? Unfortunately, these options usually won't provide you with an accurate selling price for your company. Why not? Let's take a look.

Basing your selling price on a restaurant in a neighboring town assumes several thing. First, it assumes that your business is of comparable value to that business, while you may have very different assets. Secondly, restaurant value can often be affected by location, so that location may be worse or better than yours. Thirdly, if you have a better or worse reputation in the community, that will affect the overall value of your business. Lastly, you have no idea how that restaurant came up with or negotiated their selling price.

Using the selling price recommended by a real estate agent has issues as well. A real estate agent is typically paid based on a commission, which means they get a percentage of the final sale. That means they'll want to sell your business for as much money as they can manage, no matter how long it takes to make it happen. What if you want to just get out of the business and move on to your next venture or retirement? You don't want to wait on the real estate agent's pocketbook to make that happen.

Adding up the assets of your business won't give you an accurate figure either. Why? It doesn't include the value of your business' location, goodwill in the community, market share or similar aspects that often makes your business worth much more than simply the sum of its parts. A good business appraiser can look at your business from the smallest aspect of operations to the grand picture in the community at large to develop a price that fits not only your assets, reputation and hard work, but also the current market conditions and how quickly you'd like to sell.

When you get a quality business appraisal, you can get a lot more than simply valuing a restaurant, you can learn how to build on your investment to get the best possible outcome. But don't forget to use a certified business valuation specialist for the process.

Tags: restaurant valuations, valuing a restaurant

Valuing a Growing Company: Get the Most for Your Business' Potential

Posted by Business Valuation Specialists LLC on May 31, 2017 1:07:00 PM

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When you've worked hard to position your business for expansion, it's really difficult dealing with people or organizations that don't value that hard work. When you need to get more for your business' potential, you need a partner who can ensure that you're getting everything your business is worth, both now and in the future. Valuing a growing company can be a difficult prospect, but it is well worth the effort involved when it's time to sell your business, merge with another company or partner with other concerns in your area or industry.

Valuing a Growing Company: Get the Most for Your Business' Potential

It could be caused by a new market expansion. Perhaps there's just more demand in your sector than there has been in the past. Commodity prices could be skyrocketing, making prospective buyers come out of the woodwork. Whatever the reason, your company is growing and you want to realize the full potential of that growth. Where do you go to make that happen?

Many business owners take a few specific directions when trying to value their growing business. They discount the value of that growth, settling for a low selling price or otherwise receiving less consideration for their company's growth potential. They overestimate the growth value, leaving the company to grow stagnant while opportunities pass them by. The third option is to get a company valuation from a business appraiser who has experience in that particular industry and with growing companies in general. But what does that appraiser base the company's value on? Here are a few areas they typically consider:

  • Future Earnings: How much is the business projected to earn over the next few years? If it's significantly higher than in the past, that needs to be taken into consideration when determining business value.
  • Market Conditions: Is the market hopping, with every business within that sector seeing strong returns? If so, how long is this trend expected to continue? Much like the housing bubble and the dot-com crash, many trends may change, though strong companies that are well managed through a down turn may expect to see a stronger market share in future upswings.
  • Innovation in the Industry: Is your business seen as a leader in innovation or does it create the same basic items or services that every company across the industry seems to produce? If you have a history of innovation, it can be expected that your growing company will continue to see strong growth, fueling a higher value.
  • Goodwill and Reputation: Does your business have a reputation for excellence in the industry? A good reputation can make a huge difference between average one-time sales and loyal, committed customers who come back for your services and products time and again. Though today's shorter attention spans make this process harder, it's an excellent indicator of future potential.

The work you've put into your business to prepare for expansion and take advantage of opportunities as they've arisen deserves to be recognized and rewarded, and valuing a growing company is a great way to document that growth. This also lets you to take advantage of future earnings beyond what normal business operations may provide, allowing you to benefit from the course you've laid in place for your company that will lead to its continued future success. 

Tags: valuing a growing business, valuing a growing company

What's different when valuing a manufacturing company

Posted by Business Valuation Specialists LLC on May 24, 2017 9:25:00 AM

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A company appraisal is a company appraisal, right? Wrong. Different industries often value different aspects of a business based on what's important in that sector. Oil and gas depends on market prices. Construction depends on demand. Repair services are often driven on reputation and goodwill of the community. So what's different when you're valuing a manufacturing company? We thought you'd never ask.

What's different when valuing a manufacturing company

  • Current market conditions. If you're manufacturing oil rigs and oil is selling for $50 per barrel, you're not going to sell a lot of rigs. This can impact the value of your manufacturing company, unless you have options to diversify into other markets. A good business appraiser takes note of market conditions and may be able to offer suggestions to improve your standing in a weak market.
  • Reputation for innovation within the company. Is your company a leader in fresh new features or adding new interfaces that hadn't been considered before? This kind of reputation can improve your company's overall value. Is this innovation supported by just a few individuals in your company? A business valuation specialist can tell you where your business' strengths and weaknesses are, allowing you to secure areas needing improvement and grow areas that are already strong.
  • Uniqueness of products manufactured. Are you the only manufacturer of your products, such as a range of after-market off-road truck equipment? Or are you one of a few dozen manufacturers producing plastic clothes hangers? Having a unique product can increase the value of your business, while manufacturing a commonly produced product can lower your overall value.
  • Brand value. Is your company known as a leader in your industry? If you're well known, your brand will go a long way towards creating interest in new products. If you have a reputation for excellence, that creates a certain level of expectation that your products are worth an additional amount, driving your company's value up.
  • Specialization. If your industry requires a certain level of precision in manufacturing and you have the equipment and expertise to manufacture products to that level of precision, you can often charge a premium for your products. That premium is reflected in your company's overall appraisal value.
  • Level of market saturation. How much room for growth is there in your market? Are there alternative markets that haven't been leveraged yet? If your market is already completely saturated with little prospect for growth, you may see a negative impact on your business' value. If you can diversify to create new features or options to expand the market again or make it feasible for segments of that market that have been previously unexplored to buy in, your business value can increase.

As you can see, when it comes to valuing a manufacturing company, many different aspects come into play that can directly impact your business' value in a very different way than companies in other industries may be impacted. For this reason, it's important to work with a certified business valuation specialist with experience in your industry to ensure you're getting the most accurate possible appraisal report.

Tags: valuing a manufacturing company, manufacturing company valuation

Valuing a trucking company to keep up with new trends

Posted by Business Valuation Specialists LLC on May 17, 2017 2:42:00 PM

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Today's supply chain logistics are rapidly evolving through the addition of new technology, business models and similar advances. Where does your business fall within this rapid change of industry? Valuing a trucking company can provide you with valuable insights to help keep up with the latest trends in the sector. Here's a quick look at upcoming trends from RCX Solutions and how business valuation helps you adapt to these changes.

Valuing a trucking company to keep up with new trends

  • We don't know where trucking policy is headed. We have a new president in office, who at least on the campaign trail, promised to grow American businesses. In theory, this could have a very positive impact on domestic shipping as international shipping tapers off. However, whether those promises turn into reality remains to be seen. This could raise or lower your company's overall value based on demand for shipping services.
  • E-logging regulations require new schedules and procedures. Every trucking company in America must be in compliance with these regulations by the end of 2017. Because of the increased accuracy of logs and the scrutiny given to the information collected in these logs, deliveries may take longer as drivers must take breaks and spent shorter stretches behind the wheel to remain in compliance with FTC regulations. This will increase the cost of deliveries and can either raise your profitability from higher delivery fees or cut into your overhead as your rates stay the same to remain more competitive.
  • Freight costs are going to keep going up. Our economy is solidly in a recovery stage, which means more consumers are buying products. That means those products need to be brought to the market, requiring more deliveries and higher demand for trucking companies. This trend will definitely increase your trucking company's value as many trucking companies didn't survive the recession or are still recovering from the economies that were put into place to get through the hard times.
  • Reefer transportation remains very competitive. Because it's a specialized sector, refrigerated transportation rates will continue to see high demand and higher rates than in the past, even with increasing transportation options and continued lower fuel costs. Increased interest in fresh foods and frozen goods in the summer are expected to put additional pressure on this sector of the industry, especially when combined with the new restrictions of the e-logging regulations making driver time that much higher of a premium. Having this capability will increase your business' overall value.
  • Partnerships and collaboration are the way of the future. One of the biggest trend in digitization is the move to partnerships and collaborations, especially between trucking companies and shippers. You'll be able to work together so your shipper is putting parcels, pallets and packages together in the most efficient configurations for your trailers, allowing you to maximize every fuel mile your tractors run. New technology will make it easier to coordinate pickup and load times based on e-logs, GPS positioning and analytical data to minimize down time. These will probably help boost your business' overall profitability and appraised value.

Smart entrepreneurs use business appraisals to determine the direction their company needs to go to get maximum growth and minimal risk. Business valuation helps you discover a wide range of aspects of your business and industry that you may have otherwise remained unaware of. By valuing a trucking company, you can quickly determine what your business is worth and where you can make improvements to boost that value.

Tags: valuing a trucking company, trucking company valuation

Going digital: How valuing an internet business helps you digitize

Posted by Business Valuation Specialists LLC on May 10, 2017 12:14:00 PM

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When your business takes place over the internet, your company often follows the newest trends. The push for digitization and the power of disruption in the market due to new business models and new opportunities that would have been difficult to track down previously have many business owners concerned about their business' future. Fortunately, valuing an internet business can actually help you prepare to go through the digitization process successfully. Here's more information to help get you started.

Going digital: How valuing an internet business helps you digitize

Today's largest lodging company doesn't actually own any real estate. The biggest sellers of music in today's world don't own any music. But with Airbnb and the Apple store leading the way to new business models and taking advantage of opportunities caused by market disruption, what does that mean to your internet business?

As you work through digitizing your business, it's important that you know where your company is strong and where it is weak. Though you could guess at these areas, hiring a business appraiser to determine these issues is often more helpful, because they work in the field and know what businesses are undertaking to succeed in today's changing world.

Many business owners make the mistake of trying to figure out the value of a company based on similar businesses that have sold in the past. Unfortunately, this can be a bad choice as it does not take into consideration any number of aspects that can impact that final value. Is your competitor in a better location or have access to more reliable servers? This can drastically impact value. Are you known for mind-blowing innovation that puts you several steps ahead of the competition or are you creating the same basic product all your competitors are producing? This directly impacts the overall value as well with regards to future earnings projections.

A certified business appraiser takes a solid look at where you're making money and where you're losing it. They'll compare your company to others in the industry, helping you figure out where you stand in terms of market share, estimated overall value and the strength of innovation in your business. Instead of having to guess based on market figures and general trends, you'll get the information from a highly trained individual who has strong experience looking at companies just like yours.

Because an internet business is already focused on technology, it's easy to get caught up in the excitement of digitization. Many businesses have thrown significant amounts of money at digitization firms without understanding how the results of those changes will impact their business. When you've gone through the process of getting a business appraisal, you'll receive the insights into how the business responds to particular problems and how that impacts your overall business value.

Though digitization and disruption are causing serious new concerns for business owners, knowing where your business is strong and where it is weak gives you an advantage over your competition. By valuing an internet business, you can gain strong insights into how your business operates internally and make changes that can help ensure your overall success during digitization. All you need to do is set up an appointment to have your business appraised to gain the knowledge you need to successfully steer your business through the process.

Tags: valuing an internet business, internet company valuation

How valuing a family owned business is different than other business appraisals

Posted by Business Valuation Specialists LLC on May 3, 2017 11:58:45 AM

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Whether you've put serious work into building a legacy for your children or are inheriting a business that has been passed down for generations, family businesses provide strong ties and require dedication from one generation to the next. That aspect of the business means that valuing a family owned business must be undertaken with a focus on the family, reputation in the community and many other facets to develop a true determination of business value. Here's a look at the differences that must be considered during the appraisal of a family business.

How valuing a family owned business is different than other business appraisals

Initially, differences in valuing the family business will depend strongly on the reason for the valuation. Is the business being sold to another family member? Will it be a gift to heirs? Are you trying to get ahead of potential estate tax issues that could arise? Is key personnel insurance being considered in case a particular individual dies or is incapacitated before the next generation can take over? There are many different reasons for getting a business appraisal which can impact the type of appraisal performed.

For many situations, fair market value is used to determine the business' value. This provides a fair distribution of the tax burden between the existing owner and the future owner of the business. It's also one of the most commonly-used approaches to valuing a business. However, in some situations, future income levels may be considered in a business that is currently growing. A good example of this is for key personnel insurance, where that individual is vital to the continued growth of the business. If that individual was incapacitated, it may cost the business future income, so it's important to own a policy that meets those future expectations.

Another area where a family business is different that a regular business is in community reputation and goodwill. Because a multi-generation business typically has some significant amount of history, it often has built significant goodwill in the community. The reputation that has been built over the decades and the existing consumer base will provide a new owner with a great deal of leverage as compared to a relative newcomer in the community. This reputation and goodwill must be taken into account during the valuation process to ensure the full value of the business is calculated.

Because family businesses are passed from one family member to the next, it's generally expected that the business will continue to see strong performance in the industry. When compared to the general uncertainty of a business that is being purchased by a stranger, family businesses are typically much more stable. Knowing that the business will stay within the family reassures customers and investors that past performance levels will be retained into the future, building confidence in the company and ensuring a promising tomorrow.

Valuing a family owned business requires a special skill set and knowledge so that the unique facets of that business are acknowledged during the process. A certified business appraiser has spent a significant amount of time being trained in aspects of company valuation using standardized methodologies in the process. If you're considering having a business appraisal completed on your family business, make sure your appraiser has certification and is experienced in appraising in family businesses.

Tags: family business, family owned business

Exactly how do you figure out how much is a business worth?

Posted by Business Valuation Specialists LLC on Mar 22, 2017 4:01:00 PM

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How much is a business worth? This question has plagued business owners for centuries. Unfortunately, the answer to that question, as to so many in life, is that it depends. What are you trying to do with the business? Why are business appraisals needed at that time? Will the current market conditions change the valuation of a company compared to a year from now? How does today's business owner figure out what their business is worth? Here's some quick insight into how a business is valued and the process that is used to calculate that value.

Exactly how do you figure out how much is a business worth?

Determining business value is a complex process. It involves looking at the business' individual practices, market share, goodwill in the community and income levels. It can also involve the market and industry conditions, the urgency of a sale, the perceived value of the company's brand and any number of other aspects that are often dismissed as inconsequential to the business value as a whole.

Part of the calculations are based on why the valuation is needed. If you need a valuation of your business because you're considering expanding and want to make sure you're on solid financial footing first, you'll need a completely different valuation than someone who is having to quickly sell a business to settle an estate due to an untimely death or the dissolution of a partnership or marriage.

Another area that can come into play is the current industry and market. If the business is positioned to take advantage of new technologies or innovations in the industry, the business' value to drastically increase beyond what the business owner may otherwise calculate. If, on the other hand, the business is floundering due to industry changes or poor market conditions, using an older business value may leave you open to risk as you overextend your credit trying to keep up with poor economic conditions.

Simply basing your business value on similar businesses that have sold recently may not give you an accurate view of your business' value either. If the business you are comparing to has a more favorable location, better position in the industry, specialties that you have not diversified into, different income levels or other aspects that impact the business' overall value, you may be under- or over-valuing your business' actual worth. 

Is your business a household name or a newcomer to the industry? This can make a big difference in how reactive your business will be to changes in market conditions. What about your reputation? A good reputation will often improve your business value as your customers perceive a higher value to the products and services you provide when compared to a competitor.

As you can see, the question of how much is a business worth is a very complicated one that requires significant experience to accurately answer. Fortunately, as a business owner, you don't need that experience. A business valuations specialist who has experience in your industry and special area of operation spends their days looking at businesses like yours to determine those values using standardized methodologies developed for specific situations.

Tags: business value, company valuation, how much is a business worth