Business Valuation Blog | Understanding Buying / Selling a Company

How does a company appraisal help when preparing a business for sale?

Posted by Business Valuation Specialists LLC on Jan 10, 2018 11:16:00 AM

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When you're preparing a business for sale, it's a difficult process. You look at your income over the past few years, how much other companies have sold for, potential interest in the company and similar issues, planning for the impact they can have on your overall expected sale price. But what if you could gain valuable insights into a wide range of strengths and weaknesses within your company, providing you with a significant opportunity to improve your company prior to putting it up for sale. This can lead to a much higher overall sale price. Here's how an appraisal can help you in this process.

How does a company appraisal help when preparing a business for sale?

There are a number of ways in which a company appraisal can be used to start developing a plan of action to ensure your company is ready before you start working through the sale process. In the initial stages, a business appraiser will look at your company's financial records. They'll be able to make adjustments to your bookkeeping entries, helping ensure that your financial statements are adjusted to reflect your company's actual income and expenses over a longer period of time. 

Another way that you'll gain benefits from your company appraisal happens when the appraiser begins to look at your company's overall assets and liabilities. Has your real estate significantly increased in value since it was purchased for your company? Is your equipment valued accurately, or do you have assets that have been completely depreciated but still retain value, such as an older but dependable work truck or table saw that was expected to fail early on but continues to function well. They may be able to recommend options to improve your late accounts in your accounts receivable or similar solutions to help improve your liabilities.

What is your company worth in today's market? Though it's easy to guess based on other somewhat similar companies in the area or market, that may not provide you with an accurate picture of your company's true worth. Market-based appraisals look at similar companies but then adjust the value based on a wide range of aspects, including the total receipts and other factors. Your company may have significantly more goodwill or a better reputation in the community, which also has significant value that is often underappreciated by owners or executives. It may have areas in which it leads the industry or innovative new products that are regularly developed, providing a strong benefit to the new owner in terms of a strong brand name that will help ensure strong growth well into the future. 

By knowing which aspects of your business are strong and which ones need to be improved, you can focus on improving the overall picture potential buyers will have of your business. Whether you've spent decades building your company or are simply preparing to sell a short-term investment, having a professional business valuation performed on it can help you vastly improve your overall profit from the sale. Make sure that you use a certified appraiser, as they will use standardized methodologies that will stand up well to scrutiny, ensuring that you have accurate information to make improvements to your company's bottom line prior to the sale.

Tags: preparing a business for sale

Small Business Valuation Services: What to Expect in the Process

Posted by Business Valuation Specialists LLC on Jan 3, 2018 1:32:00 PM

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When you run a small business, you know that you wear a lot of hats, sometimes with limited degrees of success. But when it comes to small business valuation services, you may feel a bit more in the dark than usual. What's involved in the process? What will you need to provide to your business valuation specialist to make the process move along more smoothly? Is it more than just looking at assets versus liabilities? Here's a quick look at the overall process and how to prepare beforehand to ensure a better, faster result.

Small Business Valuation Services: What to Expect in the Process

Going through a business valuation can be a daunting prospect, especially when the business is relatively small. Fortunately, it's not nearly as difficult as it may sound. To start, the appraiser will ask for some details on your company and will almost always request copies of some of your recent financial statements, such as tax returns, income statements, balance sheets and similar information. The appraiser can then take that information and study it to see where your company's patterns fall and where adjustments may need to be made to create a more accurate view of your company's average activities across the years. They may ask for additional information or ask questions about reports that fall outside of the norm. 

Once the appraiser has a good grasp of what your company's income has been, they can look at a number of different aspects that may also impact your company's performance. What condition is your industry in? Is the market thriving or failing right now? These aspects can impact how well your company will do in the future, so they have a strong impact on the appraised value of your business.

One question that often takes business owners by surprise is when they're asked for the reason for the appraisal. A company's value should be the same across the board, right? Not necessarily. When a small business is being sold due to the death of the owner, the heirs may be willing to wait for the right owner or may want to dispose of the company quickly, which will impact the selling price. In other cases, one heir may be interested in buying out the others to keep the company in business, in which case those selling will want to get as much as possible while the buyer will want to pay as little as possible to keep the legacy business in operation.

Another area of concern is the importance that your company's reputation, goodwill in the community and innovations will play in the overall value. When a company is known for delivering superior service or products, it will often sell for more than one that offers more average fare, as will a business that has become a fixture in the community. A reputation for innovation in design and services can also quickly raise a company's value much higher than may otherwise be expected.

By knowing what to expect from small business valuation services when you're planning on having your company appraised, you can be better prepared for the experience and can help ensure it moves along smoothly. However, when selecting a business valuation specialist, make sure you look for one who is certified and who has experience in your industry. This will help ensure that the process goes as quickly as possible while making sure the report generated is the most accurate it can be.

Tags: small business valuation services

How are valuation multiples calculated?

Posted by Business Valuation Specialists LLC on Dec 27, 2017 12:37:00 PM

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When you're looking at a business' overall financial standing, one term that is often tossed around during a business appraisal is valuation multiples. Multiples of what? How is the number calculated? What does it mean to your company's value on the market? Though it can seem like a complex concept, it actually breaks down fairly simply. Here's a quick overview of what valuation multiples are, how they're calculated and how they can impact a company's overall value.

How are valuation multiples calculated and how do they impact your bottom line?

What are they?

Much like multiplication, a valuation multiple represents a specific business value multiplied by a particular figure. That value is typically related to income in the form of discretionary earnings, gross revenue or market conditions. The figure by which it is multiplied is the valuation multiple. Depending on the company involved, this multiple can be anywhere from a small single digit to pushing three digits. 

How are they calculated?

Multiples represent a certain expected amount of income per year. If a company has a multiple of 3x, it means that a buyer is willing to pay the equivalent of three times the expected income to the seller. This means the company's income will pay back the investor over the course of three years, if it continues to perform as expected. A multiple of 5x means the company is valued at five times the projected annual income and that a buyer will see the investment returned over a five year period. However, if a company is actively growing, much higher multiples may be seen.

How do they affect your company's financial situation?

But what impact can these multiples have on your company's financial situation? A startup tech company may only have revenue of $50,000 the first year of operation and $200,000 the second year. If it's purchased at this point, where should the multiple fall? If it's expected to grow to a $20 million annual concern within five years, even paying a 10x multiple on the current $200,000 annual income would only equal a value of $2 million. In this case, a 50x multiple may be considered acceptable.

This not only applies to buying and selling a company, but also to the process of securing financing. Will the tech company, as it stands, be able to reach that level of growth? If it needs additional capital to be able to pull off the expansions that are needed, the company needs to be able to prove to the bank that the company will be able to pay back those funds in good time. An appraisal from a certified valuation specialist uses standardized methodologies to document the company's ability to repay the loan that stand up to strong scrutiny in financial circles, making it easier to secure the financing.

By having a good idea of how valuation multiples are calculated, you're in a better position to improve those numbers and pay or receive a fair price for your company, whether it's for a business loan, a company sale or a business purchase. Knowing where your business stands allows you to improve areas that are weak and push areas that are strong even further to help ensure a successful venture. By working with a certified business appraisal specialist, you're ensuring that the multiples and figures you work from are accurate and represent a solid calculation of your company's overall value.

Tags: Business Valuation, Valuation Multiples

What is EBITDA? How does it impact your company's finances?

Posted by Business Valuation Specialists LLC on Dec 20, 2017 3:08:00 PM

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When you're trying to figure out your company's finances, there are a wide range of formulas and techniques that are available. But which one will work for your company and how will the different options impact your bottom line? One option is looking at earnings before interest, taxes, depreciation and amortization (EBITDA). But exactly what is EBITDA? Here's a look at how this type of value is calculated, what it means to your company and how it can affect your bottom line.

What is EBITDA? How does it impact your company's finances?

So exactly how is EBITDA broken down? Let's take a look:

  • Earnings: This refers to net profit, or the amount of money your company is bringing in minus expenses and overhead.
  • Before: This one's as simple as it sounds - it's the earnings before everything else is taken away.
  • Interest: Interest is typically the figure listed on your company's income statement. It represents the cost of interest on loans and similar financial instruments for that period.
  • Taxes: Taxes are also taken from a company's income statement, making it easy to work them into the figure. This refers specifically to income taxes only.
  • Depreciation: Depreciation refers to how much value an asset has lost over a particular time period. It may be determined using a depreciation table or schedule, or using an equipment valuation to determine change in value.
  • Amortization: Amortization is the expense of a loan, typically in terms of the amount of the loan that has been paid over the year, representing a gain in an asset's value to the company and a lowering of debt.

In general, EBITDA is a great way to determine a company's profitability, but not necessarily its cash flow. This is because it does not actually represent cash earnings, but looks at a wide range of other factors that may come into play with a company's finances. Because it is not a generally accepted accounting principle measure, there is greater leniency with regards to what exactly is included in the statement. It was originally developed to determine a business' ability to service debt. As time rolled on, it became more common when industries had expensive assets that were used for long periods of time. Since that time, it's become a commonplace calculation in virtually every available industry, including the tech industry.

Another report that provides the same basic information is the earnings before income and taxes, or EBIT. The only difference between these two is whether the depreciation and amortization are included in the calculation. When they are excluded from the report, it doesn't mean that they're not being counted, because earnings in this situation refers instead to the company's operating profit.

What is EBITDA? Now that you have a better idea about how this income can be calculated, it's much easier to gain an understanding of how your company operates and its overall financial health. Another aspect of that understanding is the insights you can gain from a business valuation. Business valuations not only provide you with the value of your company, they also deliver information on the market, the industry, your competition and where your company is strong and where it is weak. Why not look at having one performed to see where your company can go from here?

Tags: Business Valuation, EBITDA

Business Appraisal: The right value a family business needs

Posted by Business Valuation Specialists LLC on Dec 13, 2017 11:03:00 AM

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When it comes to the value a family business may hold for different members of that family, the results are mixed at best. One person wants to know the fair market value while another wants to wait for the right buyer and a third wants to know how much they can get right now with a liquidation or salvage price. Which approach is the right one for which situation? Here are a few scenarios to consider when determining the best answer to that question.

Business Appraisal: The right value a family business needs

  • A grandfather is passing on his construction company to his grandson. Both of them realize that some amount of money needs to change hands. But while granddad is trying to fund his retirement, junior is trying to break into the business for the lowest possible outlay. Finding a fair market value is an excellent way to make sure both sides get a fair shake and a great deal.
  • Two brothers have run a printing company together for years, but now one wants to try something different. They both want to be fair while still ensuring that the printing company can continue to function well for years to come. How do they determine the value the brother who is leaving brings into the company to compensate him for his work and investment over the years?
  • After the terrible car accident that took their father's health, the family is trying to figure out how to sell off the company that he had built over the years. One sibling stayed at home to care for him and, feeling the financial strain of caregiving, feels the company should be sold off as quickly as possible. Another sibling wants to hold onto the company as long as possible to find the right buyer to maximize profits. How should the situation be handled in a way that is acceptable to all parties? 
  • A daughter has finished an exceptional education and is coming back home to help run the family business by running the marketing department. Her brother never left after high school and has been operating a forklift in the warehouse for several years. The ideas the daughter is bringing to the company may provide significant growth while the brother has steadfastly made sure everything was done while she was away. How can the parents make sure each child gets an equitable portion of the business and how is that figure determined?
  • A family member has contracted a serious illness and needs to cash out their portion of the business to cover expenses while receiving treatment. Should the value be determined at a salvage value, a fair market value or based on income that is expected in years to come? How can that value be determined fairly for all family members, both leaving for health reasons and those staying to maintain the company?

By knowing what you're trying to accomplish with a business appraisal, the value a family business may bring can be made much clearer. But before you simply look in the paper or call a realtor to decide how much your family business is worth, you'll want to consult with a certified business valuation specialist. They can help you find the right method for your situation while providing you with valuable insights into your company, competition and industry.

Tags: value a family business

What is Seller's Discretionary Earnings (SDE)? A Quick Look at this Earnings Type

Posted by Business Valuation Specialists LLC on Dec 6, 2017 1:43:47 PM

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What is Seller's Discretionary Earnings (SDE)? As the wording suggests, it's a type of earnings or income that is calculated when a business is changing hands. But how is it different than other types of income you may see in the business world and how will it impact either your company or personal taxes, especially as it can impact a company's value as you enter the sale process. Here's a quick look into exactly what SDE is and how it can affect your finances.

What is Seller's Discretionary Earnings (SDE)? A Quick Look at this Earnings Type

Let's take a look at SDE based on each side of the equation during a business sale. If you're considering buying a business, the seller's discretionary earnings provides you with the information you need to develop an accurate prediction on your return on investment as well as get a better understanding on how realistic your expectations are of the business itself. For the seller, this calculation allows you to maximize your business' overall value before you get into sale negotiations. Preparing a business for sale can often bring up a range of various expenses which may or may not have an effect on a company's overall valuation. Understanding SDE allows you to make smart decisions while preparing to sell.

But how exactly is SDE calculated? If you've been following our blog, you may have seen the explanation of Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) a few posts ago. SDE is a combination of EBITDA and owner's compensation. Here's a look at what is often considered to be part of calculating owner's compensation:

  • The benefit expected to be given to one owner. As a standard part of this calculation, this is an adds one owner's compensation back. This is especially important when a share of a business or partnership is being sold. When several owners actively participate in operating the business, the calculation requires that projections be calculated to determine the value of the selling owner's effort and labor in the company.
  • One-time expenses that were paid. These expenses cover a wide range of single purchases, but can include things such as a website design service, purchasing a specific license, an application fee for a particular service, benefit or membership as well as any number of other one-time expenses to the company.
  • Non-business-related income or expense. Did you run consulting income through an e-commerce business? Was there a little extra time you took for personal time on a business trip? Maybe you charged your business rent for the cost of your home office. If you needed to put an automobile expense through your company when it doesn't typically need a car to do business, that's another example.
  • Adjusted expenses. Let's say your business has a small website but also a large warehouse. The expense of the warehouse to fill orders must be adjusted as part of the website's expenses and is worked into the business' overall earning statements.

What is Seller's Discretionary Earnings (SDE)? By having the answer to that question, you gain a much better grasp of exactly how your business' finances function and what changes you can expect as a business changes hands. Understanding this type of income calculation means you can better understand how a company is being valued based on this type of income and how it will impact your final business value figure for the sale.

Tags: Seller's Discretionary Earnings, SDE

Do you know how to price a business for sale? We do!

Posted by Business Valuation Specialists LLC on Oct 18, 2017 10:42:00 AM

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When you're looking at buying or selling a company, there's a lot of work involved in determining whether it's a fair bargain. But most people don't know how to price a business for sale. Some look at the income and expect it to stay about the same, while others simply tally up the value of the assets and deduct the liabilities. But there's much more involved in developing a fair price for a company. Here's a quick look at the overall process to help you get started.

Do you know how to price a business for sale? We do!

There are a few different methods used in determining company value. Here's a quick overview of each type.

Asset-based business valuation is focused on the business' value on a balance sheet. It looks at the value of the assets minus the total of the company's liabilities. However, this type of valuation typically does not represent actual company value. It does not take into consideration future business income, the condition of the market, goodwill in the industry or community, or most other areas that truly drive up company value. Though this is the simplest way to determine value, it's quite often the least accurate.

Income-based business valuation can be used in companies that have regular and irregular income. It's commonly used with companies that have had a regular growth rate over the years and expects to see the same rate of growth well into the future. In general, the future income is discounted to allow for current values and the company's value at the time of sale is determined based on that information. This is a commonly used approach for smaller businesses or those who are stable in the industry and market.

But what about when the market the business is in is currently or expected to be in a strong growth spurt? As an example, companies that have spent decades perfecting home automation technology are now seeing strong growth as this technology becomes mainstream. To base such as company on its past income, before the market began to take off, does not accurately reflect the company's future value. One way this type of company's value is determined is using the sale of similar businesses around the same time. A publicly-traded company with similar assets, receipts or income may have its value adjusted to reflect the private company being valued.

Though it can be tempting to work with a real estate agent or use the sale price of other companies to determine company value, the best route to take to get an accurate value is a certified business valuation specialist. These individuals train to determine the best possible approach for valuing a business by using methodologies that have been tested in legal, financial, tax agency and insurance circles. When they determine a company's value, you can rest assured that it will hold up well to outside scrutiny and reflects a fair price for the business.

By knowing the basic process of how to price a business for sale, you can ensure that you're in a better position to understand the niceties of how the business works. When you're considering purchasing or selling a company, having a better overall knowledge of how business and valuation works, you'll be better able to maneuver through the business world.

Tags: how to price a business for sale, business pricing

How is goodwill calculated in a business valuation?

Posted by Business Valuation Specialists LLC on Oct 11, 2017 10:49:00 AM

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We've all seen examples of it. A business which, though nothing special at first glance, has amazing customer loyalty in the community and a larger market share than makes sense in the area. How exactly does the business gain this type of reputation and loyalty? Even more important, how is that part of the business valued in an appraisal? Goodwill can often have a great deal of benefit and monetary value but is a complex topic. Here's a quick look at how the process works.

How is goodwill calculated in a business valuation?

Unlike your company's material assets, which is considered a tangible asset, goodwill is an intangible asset. It can not be calculated outside of a full business valuation. But exactly how is it calculated? The most basic calculation takes the fair market value of a company's assets and liabilities, and then deducts the amount from the sale price of the business. The remaining amount represents the company's goodwill.

However, it's not as simple as adding up columns in a ledger. How do you calculate fair market value for your company's assets and liabilities? How can you be sure that the figure you have calculated is actually accurate? Will it stand up to strong scrutiny if your business ends up dealing with insurance, legal or financial woes?

But where does goodwill come from and how can you determine whether your company has acquired it? It can come from a wide range of aspects of your company. Are you top in your industry and well known for developing innovative new techniques, products or services? Perhaps your industry is entering a boom and the anticipated future income is increasing its value beyond what it would normally sell for. This is yet another example of goodwill.

What about strong community ties? A company that has spent many years or even decades in the community, building a name and a strong customer following, may have additional value for those reasons. Even better, it's quite often value that a new owner may be able to leverage to their advantage. This is especially true when the previous owner helps pave the way with the community or industry.

Calculating all these potential sources can be difficult, especially if you're considering selling or buying a business. Justifying the amount to be paid for goodwill is equally difficult. What is fair market value for your company's assets? When you have a company that has generated significant goodwill in your industry or region, it can be hard to determine the value of that reputation. Fortunately, you don't have to. A certified business appraiser has the training and experience to create a valuation report that reflects the value of all your company's assets, tangible and intangible.

When a certified business valuation specialist prepares a valuation report, that individual has the knowledge of how to best determine the company's overall value and then calculate the goodwill by separating out the fair market value of the assets and liabilities. But in addition to simple cash value, they will also consider the market conditions, the industry as a whole and any other aspects that may impact the company's value.

Once this process is complete, they'll present the results in a report for your consideration. Once all parties agree that everything has been included in the process, the final value and the value of the goodwill is settled. From that point, it's up to you to decide what to do and with a certified appraiser's report, you'll be able to negotiate from a position of strength.

Tags: Business Valuation, goodwill

Why is a business appraisal important when buying out a partner?

Posted by Business Valuation Specialists LLC on Oct 4, 2017 3:08:00 PM

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When you started your business, your partner was a vital part of making it a success. But what is the value of that partnership? It may be a question you haven't really considered in the past. But now that they're moving on to another company, another opportunity or to just take it easy, suddenly the cost of buying out a partner is a real concern. A business appraisal can help make the process go much more smoothly. Here's why:

Why is a business appraisal important when buying out a partner?

There are a few aspects you'll need to consider during the appraisal process. The first is whether there are any existing agreements that were made previously on what will happen when a partner leaves the business. If you already have a buy-sell agreement and valuation formula in place, you may be bound to that agreement, provided that it was laid out in a fair manner and agreed to by all parties. Having this type of agreement in place prior to a partner deciding to leave the business can drastically speed up the process while mitigating many disputes over valuation.

What if you don't have one in place? Then you'll need to agree on the value of the partner's share in the business. Unfortunately, when one partner has been more involved in the operation or profitability of the company, that can quickly become a contested operation. At that time, having a business valuation performed can make a huge difference in how quickly the process proceeds for all parties concerned. But why is a business valuation better than sorting it out on your own or with an accountant?

When you work with a certified business appraiser to determine your company's value and the value of the exiting partner's share of the business, the appraiser has no stock in the outcome. This level of independence means that they can calculate the overall value without any bias. The certification process means they know exactly how to calculate that value in a manner that will stand up to strong scrutiny, because the methodologies they apply have been tested in a wide range of situations and found to be fair and equitable.

Beyond that, when it comes to calculating what a partner's portion of the business value should be, it can be an onerous task. Because business appraisers spend their days calculating the value of not one, but many businesses, in a wide range of situations, there are none as well situated to deal with your partnership's concerns. They're able to look at reputation, business activity involvement and similar concerns, while still being able to discuss and defend how the figure was calculated in the first place.

By having a business valuation in place when buying out a partner, you don't need to worry about negotiating back and forth over the cost. You'll have a solid value determined by an independent party. But when you do go through this process, make sure you use a certified business appraiser, as they'll have appropriate methodologies to properly value your partner's share. A business valuation provided by a certified appraiser holds up well to strong scrutiny, especially in legal or financial circles if you need help with a difficult personality or coming up with the money to make it happen.

Tags: buying out a partner, partnership disputes

Why is a company appraisal helpful when buying a business?

Posted by Business Valuation Specialists LLC on Sep 27, 2017 1:32:00 PM

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Buying a business is a big investment. Though it may be the culmination of a lifelong dream, there's always a chance that dream could turn into a nightmare. From poor profitability to hidden problems with assets, knowing what you're getting into before you buy is always a good deal. Here's a quick look at how a company appraisal can be a big help during the process.

Why is a company appraisal helpful when buying a business?

As you look at a company you're thinking about buying, what kind of information do you need? Finances, reputation, market share: all these areas tie together into a picture of the company's overall value. But how is that value determined? Most of the time, the business is worth significantly more than just the sum of its assets once liabilities are handled.

A company appraisal provides you with a great deal of information to help you decide whether it's a good investment or not. The appraiser starts by taking a solid look at the company's financial records. They can determine what the expected future income of the company will probably be, based on its financial history. 

But what if your company is in an industry that has really taken off recently and the owner wants to take advantage of that potential in the sale price? A business valuation takes a deep look at where the market currently stands and where it's projected to go in the future. That helps you to decide whether the investment is a good risk or not.

What about the company's reputation in the market or community? If the brand is well known for high quality products or services, you can benefit from that reputation and community goodwill when you buy the company. This may allow you to see better returns with less overall work in a shorter period of time.

Is the company known for its unique approach to innovation and development of state of the art products? This is another area where a business appraisal specialist can look at what the company has done in the past, what their market share is and what you may be able to expect from that advantage well into the future.

Are there areas for improvement? Many businesses operate at less than peak efficiency for the majority of the time. If there is room for improvement, you can quickly turn a mediocre level of profitability into a truly outstanding one. The appraisal report will include some information on where improvements could be made.

How well does it hold up when compared to its competitors? Part of the business appraisal process involves looking at the industry or regional market, depending on the type of business you're getting into. When it comes to business value, there are a wide range of factors that can make the business you're considering buying better or worse than others, depending on location, well-known employees or other factors.

When you take the time to investigate the company you're purchasing carefully, you'll quickly find that the benefits well outweigh the costs. A company appraisal performed by a certified valuation specialist helps ensure you're making a wise investment instead of throwing good money after bad. By finding an appraiser with experience in your industry, you're sure to make a great start when buying a business.

Tags: company appraisal, buying a business