Business Valuation Blog | Understanding Buying / Selling a Company

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

How can you use business valuations for SBA loans?

Posted by Business Valuation Specialists LLC on Sep 20, 2017 10:14:00 AM

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Whether you're a first-time business owner or a multi-company veteran, going through the process of setting up a business loan can be truly nerve-wracking. Fortunately, when you use business valuations for SBA loans, you're helping provide solid evidence of your company's value. Why? Let's take a look.

How can you use business valuations for SBA loans?

Though there are many circumstances under which you can qualify for an SBA loan without a business valuation, the 2008 market crash and ensuing government regulations tightened up many of these options. But in what circumstances may you be required to get a valuation?

  • Any 7(a) guaranteed loan will require a business valuation to be performed.
  • Refinancing debt that was originally used to handle a change in ownership may require an appraisal.
  • The buyer and seller are closely related, such as a family member or business partner, to ensure the value is correctly stated.
  • If a significant portion of the business' asset is tied up in real estate, as the value may not hold if the property value falls.
  • When the amount being financed is greater than $250,000 beyond the appraised value of real estate.

But beyond the requirement of having a business valuation performed to help secure your SBA loan, there are many other reasons why it's just a good idea. A business valuation provides you with a solid point to negotiate from if you're buying or selling a company. It validates the asking price you're presenting to either a prospective buyer or to your loan officer. This verification of value also provides you with a basis for an insurance claim if your business suffers from a natural disaster, fire or similar crisis.

Another area where this type of information comes in handy is in your initial bookkeeping when you purchase a company. When you receive a business valuation report, you can then use it to allocate value to your different assets, allowing you to determine your depreciation schedule and similar areas of interest for your accounting purposes.

Speaking of accounting, do you know how the company has performed in the past? Part of the process for income-based appraisals involves taking a good, hard look at the business' income. Is it regular or irregular? Should the cost you're paying represent several years of slow-burning market building or the phenomenal sales it's seeing right now? An experienced, certified business valuation specialist can help determine which of these approaches are appropriate in your circumstances and that will be reflected in the report they create.

What about if you're considering buying into a partnership? A business valuation provides strong documentation of the company's performance and your expected benefit from that past performance into the future. It looks at a wide range of factors and can help you figure out where your prospective company is strong and where it is weak. This allows you to quickly make changes that will create strong returns on your investment.

By using business valuations for SBA loans, you're ensuring that your prospective business is not only a good investment, you're backing it up with solid proof on the matter. But before you go with just any business valuation firm, make sure that they are certified and have experience with similar companies in your area. Why? The certification process ensures your business appraiser knows the best methodologies to apply to your specific situation.

Tags: bank financing, SBA Loan

What are the Different Business Valuation Report Types?

Posted by Business Valuation Specialists LLC on Sep 13, 2017 10:10:00 AM

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As active members of the business valuation world, we understand that there's some confusion over the wide variety of business valuation report types. Because we regularly receive questions from clients about all the different types, we've put together this short guide to help you understand how these different types work and in what situations they may be appropriate.

What are the Different Business Valuation Report Types?

Assets

  • Adjusted Net Asset Value: This method adjusts assets and liabilities to fair market value, providing a realistic view of the business' overall value. It does not, however, account for any values beyond the company's assets minus its liabilities, leaving intangible assets out of the calculation.
  • Liquidation Value: This is based on the idea that a business will cease and calculates the orderly or forced liquidation value of business assets. Though this is commonly seen in bankruptcies, it's not often used for solvent companies as it represents a worst-case scenario.
  • Book Value: This method is only very rarely used because it is based on accounting values, which can be rapidly depreciated, rather than real-world value, such as equipment that is depreciated in one year, but is expected to have a long lifespan.
  • Excess Earnings: Used to measure reputation, goodwill and intangible value, this method calculates the earnings considered to be above normal return on assets, which works well when a business' reputation is part of its value.

Income

  • Capitalization of Earnings: When a business earns a regular increasing income, this method projects that increasing income to a certain point in the future to calculate value.
  • Discounted Earnings: Also referred to as Discounted Cash Flow, this method is used when a business has inconsistent growth or income. Much like Capitalization of Earnings, it projects the expected current value of future growth.

Market

  • Guideline Public Company: When a private investor buys stock in a public company, that data is recorded. In this method, that value is applied to a similar private company and adjusted for differences between companies.
  • Guideline Company Transactions: This method uses the value of closely-held businesses of a similar industry, size, location, product and service to calculate the value of the business being appraised. The comparative value of recent revenue is generally considered more important than that of historic sales levels, allowing valuation at current value rather than historic value.
  • Multiple of Discretionary Earnings: This method takes a similar small company's financial statements and adjusts them to the company being appraised. The sample company adjusted earnings from transactions is divided by the discretionary earnings, providing a multiplier that is then applied to the discretionary earnings of the company being appraised.
  • Gross Revenue Multiple: By dividing transaction price by the appraised company's revenue, a company's value can be determined as compares to the similar business' to determine an appropriate multiple. Unfortunately, it doesn't distinguish between companies that are running at a profit and those that are operating at a loss, making it less than accurate.

With all the different situations a business may find itself in, it's important to have a range of business valuation report types available. These different types help you get the most out of your company, no matter your circumstances. By having an idea of what each report type represents, you can better grasp the overall information presented in your valuation report and how it applies to your situation.

Tags: business valuation report types

Why Business Valuation Cost is the Best Money You Can Invest

Posted by Business Valuation Specialists LLC on Sep 6, 2017 9:28:00 AM

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When an entrepreneur faces a business valuation cost is one of the first aspects that comes into play. However, it should actually be one of the last considerations when getting a quality business appraisal performed. Why? Business valuations provide companies with the information they need to boost profitability and improve operations. Here's why getting a business valuation is one of the smartest ways you can invest in your company.

Why Business Valuation Cost is the Best Money You Can Invest

If you're curious about how a business valuation can help you improve your company's profitability, you're not alone. When a business appraisal is performed, a professional appraiser spends significant time studying not only your company's finances, but also its assets, operations and practices. Because a professional appraiser spends their days looking at how businesses operate, they have a much better idea of how your company compares to other companies it has appraised over the past few months. They'll then prepare a report that reflects their findings which you can put to use to your company's benefit.

From this level of experience comes any number of valuable insights. Is your business ahead or behind in terms of digitization? Are all the other businesses in your industry in a slump or just the ones in your region? Do you have a unique research and development process that adds to your company's overall value? Do you have undervalued assets that you could bring to bear and leverage to grow your company? Though these topics can seem unconnected to your company's overall value, they actually play an important role in determining that figure.

You can also use your financial data to discover where your company can go from here. What about accounts receivable or payable? Is it normal to have over 10% of invoices still due after 30 days in your industry? Have you completely depreciated equipment and assets that actually still hold significant value? How will the recent change in land and real estate values in your area impact your company's overall value? Is your overhead too high compared to other businesses of your type in the area?

Where you take your business after the report is generated is up to you. Among the areas the business valuation report will cover includes information on your internal functioning, how your business compares to other businesses in your region, the condition of your industry as a whole and similar aspects. With this information, you can quickly take advantage of market conditions, gain a better understanding of your business' overall value and make improvements to boost that value. By using this information, you can leverage new found equity to expand your operations, diversify into other areas of your industry that are opening up or solidify your operation to provide years of reliable income. Compared to the benefit of actions you can take with the information provided in an appraisal report, the original cost is actually quite low.

Though business valuation cost can initially seem high, the information and insights it provides into your business' daily operations and overall business plan makes it an excellent investment in your company's future. If you're considering having an appraisal performed on your company, make sure you're working with a certified business valuation specialist to ensure you'll receive a report that provides an accurate picture of your business, using standardized methodologies that have been proven over time.

Tags: business valuation cost

What to Expect from a Good Business Valuation Experience

Posted by Business Valuation Specialists LLC on Aug 30, 2017 11:28:00 AM

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Business appraisals are a fairly regular occurrence, especially when a company is changing hands or an acquisition is taking place. But what happens during the process? What should you expect in a good business valuation experience? Here's a quick look at how the process works, when you should be concerned and what to expect at the end of the appraisal.

What to Expect from a Good Business Valuation Experience

When you have a business valuation performed, the process starts by contacting a business valuation specialist, determining whether that specialist is a good match for your business and providing initial information. That information will usually include the reason you are seeking the appraisal, as different circumstances will require different methodology be used in determining value, some of which are required by law.

Why? Let's look at a few circumstances. If a business needs to be sold, is it a liquidation due to debts? Is it to determine the value for one partner to buy out the other over time? Is it for an entrepreneur who is planning on retiring in a few years and wants to get the best possible selling price? Each of these circumstances will have a different set of calculations made to determine value, because the length of time and potential to find the right buyer will vary in each case.

After the specialist has determined the circumstances, they will need information on your business' finances. Much of this information can be procured from your CPA or bookkeeper. Your financial statements, tax records and similar information can help determine where your business stands, both in general and when compared to other businesses in your industry. 

Once your finances have been reviewed, the industry as a whole will be looked at by the specialist. If there is a difference between the market locally and the national market, that will also be reviewed to account for these differences. Then your business' financial information will be projected along the path expected by the market in general.

However, that's not the entire process. If your business has built up goodwill in the community or a solid reputation for excellence, that's part of the business value that needs to be accounted for. If you've developed a really amazing research and development department, that investment in innovation will have a very strong impact on your business' value.

But what about the people that make the best parts of your business? Good leadership can make all the difference between a strong, dynamic company and one that is just the same as every other one in town. Both internal leadership and external contact may be interviewed so that the specialist can account for the value they bring to your business. 

What if something is missed? Any good valuation specialist allows time in the report preparation process if the business being appraised feels that the report doesn't reflect the true nature of the business or has missed something important. This allows the specialist and the appraised business to come to an agreed consensus on the business value and ensures that nothing is missed in the process.

Though going through a business appraisal can cause some apprehension, working with a good appraiser helps ensure you'll have a good business valuation experience. Working with a certified business valuation specialist helps ensure you'll receive honest results that will hold up well to scrutiny in legal, financial and insurance circles while providing documentation that will prove the value of your company.

Tags: business valuation experience

Why do I need a business valuation for bank financing?

Posted by Business Valuation Specialists LLC on Aug 23, 2017 2:24:00 PM

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When you're working on securing a business loan, the last thing you may be thinking about is a business valuation. However, it should actually be one of the first aspects you should consider. When you get a business valuation for bank financing, you actually receive a much greater benefit than a simple figure that sums up your company's value, and the information it provides your financial institution makes it much easier to get through the paperwork and get to running your business.

Why do I need a business valuation for bank financing?

When you're trying to secure bank financing, the financial institution you're working with may require you to have a business valuation performed on the company you're purchasing or already own. When the housing bubble burst in 2008 and the various industrial bailouts happened, there were many new regulations put into place that require entrepreneurs to prove better intention of paying back the loans they had taken out. That lead to a tightening of the approval process. Fortunately, this is one area where having a business valuation performed by a certified business appraiser can help you secure your loan more easily.

When appraisers go through the certification process, they learn not only how to value a business, but how to do so using a series of standardized methodologies. Why? As the appraisal process has moved forward, there have been plenty of opportunities to test appraisal calculations and processes in legal, insurance and financial circles. Those calculations that did not bear out have been eliminated from standardized practice over time while those that worked well have been upheld time and again. 

As time progressed, the certification process began to include the methodologies that have worked well. Because these methodologies have been used time and again, business valuations performed by certified appraisers began to hold more weight. In financial circles, banks and other financial institutions have come to realize that a business appraisal report completed by a certified appraiser is much more likely to have accurate values, so they don't need to worry about losing money.

But the appraisal report contains much more than a simple figure determining your company's value. It also contains information about where your company is strong, and where it is weak. It provides you with dynamic insights to help you improve your business' poor performance in some areas while allowing you to grow the practices and processes that have lead to areas of strength. It will give you a solid overview of the condition of the market, your competitors and where you fit into your industry as a whole. By having this information and taking action based on the report, you can quickly improve your business' bottom line and overall value, whether it's by revamping your accounts receivable process, expanding your research and development department or any other improvements you find wanting.

As you can see, getting a business valuation for bank financing provides you with significantly more information than what you may expect, but how you use that information to your company's benefit is up to you. By harnessing that information, you can quickly create a more dynamic, responsive business. In our current age of digitization and disruption, a business valuation provides you with the insights and flexibility you need to keep your business ahead of the curve.

Tags: bank financing, SBA Loan

What's Involved in a Typical Business Valuation Process?

Posted by Business Valuation Specialists LLC on Aug 16, 2017 12:24:00 PM

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When business value needs to be determined, it can seem like a very mysterious process. The appraiser looks at your numbers, considers some areas you may not have expected, looks around at the industry and then provides you with a figure. But what's really involved in a typical business valuation process and where does that information come from?

What's Involved in a Typical Business Valuation Process?

When a company calls a business valuation firm, they often don't know what to expect. But from the moment of that initial contact, the business appraiser is already gathering the information needed to begin the process. Questions such as why is the appraisal needed, how is the business organized and what are the plans for the future of the business actually play an important role as the appraiser determines what information will come into play during the appraisal process.

Why? When a company is being eventually sold or merged with another is a completely different situation than when a business needs to be sold quickly to buy out a partner in a divorce or satisfy estate requirements. In one situation, the business can wait for the right buyer, while in the other, some level of liquidation and compromise will need to take place to meet the timeline set by the courts. But in either case, what will happen next?

The appraiser will then request some information. Typically, this will start with financial records. This helps the appraiser see where the business stands currently. They'll take a look at historic financial statements and adjust them as necessary to gain the best possible picture of your company's financial history. This will help if an income-based approach is used to valuing the business.

But what about your business' reputation for excellence in the community or industry? This will come into play as well. If your restaurant represents the only real place to go for exceptional Italian cuisine and is a hit in the area, it will have a much higher value than an average cafe that doesn't stand out from the crowd at all.

Your assets will also come into play. Do you have an exceptional location for your store or service? This will be reflected in the appraised value as it is calculated by the valuation specialist. If your equipment has been very well maintained and is expected to provide many more years of reliable service, it's worth much more than neglected machinery that will need to be replaced before production can really begin again.

What condition is your industry or market in? Selling a residential construction company right after the housing bubble burst in 2008 wouldn't have gained you much, but selling an oil drilling company when the Williston oil fields were just being tapped would have provided a significant profit. When your market is going well, you're much more likely to find a buyer willing to invest.

Though the business valuation process can seem complicated, it really just looks at the information that is available and then determines a fair value for that company. A certified business valuation specialist can make this process seem easy because they've spent significant time during the certification process learning which approach is needed in which situation. By taking advantage of this knowledge, you can quickly gain important insights into your business' operations, place in the market and potential for improvement.

Tags: business valuation process