Business Valuation Blog | Understanding Buying / Selling a Company

Why are your reasons for a business valuation important?

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

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

Why are your reasons for a business valuation important?

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

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

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

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

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

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

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

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

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

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

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

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

Tags: how do you determine the value of a business

Using a Business Valuation to Decide How to Price a Business for Sale

Posted by Business Valuation Specialists LLC on Sep 5, 2018 1:26:41 PM

When you're considering selling your business, do you know yet how to price a business for sale? If not, you're not alone. Most business owners don't have a solid idea of where their business stands in terms of its overall value or how to improve that value prior to the sale. Fortunately, you don't need to learn the entire process, you just need to have a business valuation performed and learn how to use the information contained in that report to improve your overall business value prior to going ahead with a sale.

Using a Business Valuation to Decide How to Price a Business for Sale

If you're considering selling your business, you have a few different ways to try to figure out the value. You could look at similar businesses in your area that have sold recently and see if you can get a similar amount for your business. You could ask a real estate agent to look at your business and let you know what you think it could sell for. You could look at your books and determine what your assets and equity are worth. 

The problem with those approaches is that they don't give you an accurate picture of what your business is actually worth. The restaurant down the street may have a better location or worse reputation that means that you're asking too much or too little for your own place. The real estate agent may price your business too high to ensure a good commission or too low because they need some fast cash. Your books may not properly reflect your business' actual value if the market is bearish or bullish. These versions of valuation will give you a value, but it's not necessarily the best value.

Additionally, these types of valuation won't provide you with ways to improve your business prior to selling, giving you the opportunity to get everything you can out of the sale of your business. The only way to ensure this is through a business valuation. But what exactly happens when you have a business valuation performed? 

The business appraiser looks at every aspect of your business, your market and your industry. They will take into account any fluctuations in the market, calculating exactly the value of your business. Does your business have a reputation for leadership and innovation in your industry? That can have a big impact on your company's bottom line. They'll also look at the finances and operation of your business, helping you find areas where your business can be improved. If there are ways you can cut your overhead, reduce waste or improve profits, a business valuation specialist can help you find it.

By taking the time to have a business valuation performed, you can learn how to price a business for sale at a fair asking price. This knowledge, in turn, allows you to make changes that allow you to get everything you can out of your company when you choose to sell it. Make certain that you work with a certified business appraiser, as they are able to act as an independent third party, providing you with an accurate business value that is completely without bias, making it a strong negotiating tool when you're ready to sell.

Tags: how to price a business for sale

Take advantage of digitization by valuing a high-tech firm

Posted by Business Valuation Specialists LLC on Aug 1, 2018 3:06:00 PM

Digitization. It's a hot buzzword everyone in the business world is talking about, with implications on every industry and sector. But did you know that valuing a high-tech firm can help you determine whether it would be a good investment with the digitization trend? Before you invest in a business for its potential with digitization trends, it's important to learn its value and all the aspects that determine that value. Here's a quick look at how you can use a valuation to determine where your new business would fall in terms of digitization.

Take advantage of digitization by valuing a high-tech firm

Because digitization is such a hot topic right now, a lot of businesses are willing to throw a lot of money at the situation in an attempt to take advantage of something they don't really understand. Let's take a minute to define exactly what digitization is and how you can take advantage of it by investing in a high-tech firm.

Digitization is an overall change in how we do business. It's a switch to mobile technology, supercomputing power, analytics, the Internet of Things and a customer-focused business model. It's causing disruption as new enterprises like Uber, AirBnB and Amazon take over the market share from traditional businesses. It's part of what's causing the ship-to-store craze and the pervasiveness of being able to track the order you placed last week, no matter where it goes. It's building transparency into business processes so that customers are comfortable with the companies with whom they do business.

If that seems like a complicated concept, it is. But it's also the way the world is going. So how can you take advantage of this change? It's easy to invest in a high-tech firm, but it's much more important to invest in the right high-tech firm. It used to be that startups had tons of money coming in from the hope of investors who wanted to find the next Microsoft. Unfortunately, the stakeholders in those companies didn't always invest those funds wisely, choosing instead to purchase obnoxiously expensive desk chairs and similar frivolous purchases.

Fortunately, there is a solid way to separate technical companies into those that are good investments and those that are poor investments. A business valuation takes a good, solid look at the business, from finances and operations to market share and competition. One area of particular interest to investors is the company's reputation for research, development and innovation. If you're hiring a certified business valuation specialist, they should be able to tell you if the company does well in adapting to changes that have come along and where they compare to other tech companies that are going through the digitization process.

By valuing a high-tech firm before you make an offer, you can determine exactly what to expect from that firm in terms of digitization. But don't settle for guessing figures based on similar businesses, what a real estate agent estimates or a friend in the tech industry thinks its worth. A certified business appraiser uses a wide range of calculations to determine a business' value based on tested methodologies that have come under strong scrutiny in legal, insurance, financial and tax circles. Only a certified appraiser can provide you with the true value of a company.

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Best Ways of Valuing a Construction Company Before a Sale

Posted by Business Valuation Specialists LLC on Jul 25, 2018 11:19:00 AM

You've worked hard to build that construction company, and now you're preparing to sell it. This is often a bittersweet time for business owners, especially those who founded the business and who remember firsthand all of the hard work in getting their construction firm off the ground. Before you seek buyers, get an objective valuation of the construction firm, so you understand how much your construction company is worth to others. Then you can set your price, seek buyers, and move forward with a sale that honors the business yo have worked so hard to create. See below for the best ways of valuing a construction company when the time has come to sell. 

Asset-Based Valuation 

An asset-based valuation works well for construction companies that hold assets, whether that's equipment or real estate. If your construction company owns a lot of equipment but there is not much income then the business may be worth more being sold off as assets. To get an asset-based value for your company, an appraiser will sum up the value of all of your assets, then subtract liabilities to show the value as a snapshot in time. A formal equipment appraisal is suggested for situations like this.

Income-Based Valuation 

An income-based valuation is a reliable way to gauge the value of a construction company when the company is generating a profit to where there is value above just tangible asset value. Either the discounted cash flow or capitalization of earnings method can be used here. In discounted cash flow, appraisers look forward five years to estimate the business's future revenue and spending, then extrapolate a current value that accounts for risk in going forward. With capitalization, the appraiser normalizes the construction company's earnings and divides by a capitalization rate, which reflects for anticipated growth and risk.

You only get one chance to sell your business, so take the time to do it right. Search for an appraiser with experience in construction company valuation, ask questions before you hire them (so you know what to expect), and make sure you understand what their business valuation really means -- not just the final number.   

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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.

Tags: valuing a consulting firm

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. 

Tags: valuing a software company