Business Valuation Blog | Understanding Buying / Selling a Company

How does a business valuation certification provide you with a better appraisal?

Posted by Business Valuation Specialists LLC on May 1, 2018 3:07:00 PM

When you need to have your company appraised, business valuation certification can be the furthest thing from your mind. However, it's a very important thing to check before you hire a business appraisal to ensure that the appraisal they provide you with will meet particular standards and hold up to strong scrutiny in a wide range of circumstances. But beyond that, why will using a certified business valuation process help provide your company with strong benefits? Here's a quick look to help get you started.

How does a business valuation certification provide you with a better appraisal?

When you make sure that you use a certified appraisal process, it helps ensure that the final value is accurate and calculated based on solid facts. During the process, a trained, experienced appraisal professional takes the time to study a wide range of aspects about your company, industry and market. This ensures that the value that is calculated for the appraisal report takes all reasonable aspects of the company's value into account. 

For example, if your company has been having strong growth, but is not remaining innovative within your industry or the market is failing rapidly, that will impact your company's overall value. An excellent example of this is the changes that oil companies have seen over the past few years. Petroleum-based companies can quickly go from running at a profit to running in the red as oil prices shift on the market. When prices drop and the industry slows down, a company that had a great value during boom times may suddenly find itself virtually worthless.

Fortunately, the depth of information and insight available in a business valuation can provide you with the tools you need to help bring your company through troubled waters successfully. It helps you improve the value of your business so that if you're working on an exit strategy, you can maximize your profit from the sale or transfer of your company. But exactly how do you take advantage of the information in the valuation report?

Because a valuation looks at your company as well as the competition, the report may mention where your business is different, both for good as well as for bad. It can look at the state of your equipment and determine whether you're going to need to replace that machinery in the near future or whether it will perform well for new owners for years to come. It determines the value of your reputation in the community, your innovative processes and the strength of your brand.

It can also look at your internal situation. If you have areas where you're increasing your overhead and lowering profitability, learning about those areas from a valuation report gives you the opportunity to make changes to those aspects. This can very quickly increase your profitability and cut your expenses, making it much easier to quickly make gains on your final sale price.

By using business valuation certification when having your company appraised, you can rest assured that the money you spend on the appraisal will be well invested. A certified appraisal ensures that the valuation will hold up well to strong scrutiny and will have accurate information on a wide range of potential issues for your business. This means you can depend on it when making important decisions about your company both now and in the future. 

Tags: business valuation certification

What are the small business valuation methods and how are they different?

Posted by Business Valuation Specialists LLC on Apr 25, 2018 1:41:00 PM

When you're considering having your company appraised, one thing that may not have come to mind yet are the different small business valuation methods. But what are they, how are they different and which one should be applied to your particular situation? Here's a quick overview of the most common methods used and how they're applied to your company's situation.

What are the small business valuation methods and how are they different?

There are three primary approaches to small business valuation: asset, income and market based. However, there are a number of different methods under each approach.

Asset-Based Approaches

Generally speaking, asset-based approaches don't work well for companies that are running in the black, but may be used in companies that are failing.

Adjusted Net Asset Value: This requires the appraiser adjust the company's assets and liabilities to fair market value.

Liquidation Value: When a company discontinues operations or restructures, the proceeds are calculated using the premise of an orderly or forced liquidation.

Book Value : Though it's sometimes used, this method has some flaws. It's based on accounting figures but often doesn't reflect the asset's actual value due to depreciation schedules.

Excess Earnings: This method combines asset and income based approaches by calculating earnings to measure intangible business assets as an extension or multiplier above a reasonable asset value.

Income-Based Approaches

An income-based approach has two methods depending on whether income is steady or inconsistent. The company's income over a period of time is multiplied to determine its overall value.

Capitalization of Earnings: When a steady income is the norm for a business, this method uses adjustments to normalize the income stream of a business for a single period, and then multiplies that benefit over a longer period of time.

Discounted Earnings: Also referred to as discounted cash flow, this takes an inconsistent or irregular income for a company and converts it to determine the current value of future income benefits for that company.

Market-Based Approaches

This type of approach uses current market conditions to determine the value of a business, whether based on income, a similar business or overall transactions.

Guideline Public Company: A similar publicly-traded company allows the appraiser uses the price investors paid for minority interests in that company and adjusts it to match the private company that's being appraised.

Guideline Company Transactions: A similar company that's closely held is used as a basis for the appraised company, with transactions analyzed and adjusted to match the appraised company.

Multiple of Discretionary Earnings: Financial statements from small companies are adjusted to represent an owner-operator. It compares adjusted earnings to create a valuation multiple.

Gross Revenue Multiple: This uses a comparable company and divides transaction price by that company's revenue to create a multiple of gross revenue.

By having a better understanding of small business valuation methods, you can gain an appreciation of what exactly your business appraisal means, how it was calculated and in what situations it may or may not apply. However, the appraisal you receive and work from is only as good as the appraiser who calculates it and prepares the report. Make sure that the appraiser you use has a solid certification in business appraisal as well as experience in your industry before hiring them for the job.

Tags: small business valuation methods

What's required to become a CVA and why does it matter?

Posted by Business Valuation Specialists LLC on Apr 18, 2018 11:40:00 AM

When you're getting ready for a business valuation, it's important that you hire the right professional for the job. A Certified Valuation Analyst (CVA) has had extensive training to receive their certification, which prepares them for a wide range of valuation situations. This means they know exactly what needs to happen to calculate an accurate valuation of your company. Here's a quick look into what's involved in the certification process and why it matters to your company's valuation.

What's required to become a CVA and why does it matter?

Certified Valuation Analyst Qualifications

To be qualified as a Certified Valuation Analyst, there are certain standards that must be met. If the appraiser is not a CPA, a business degree is required from an accredited educational institution. A minimum of two years of full-time experience in business valuations, significant enough contributions to be listed on 10 or more valuation reports or demonstrating substantial knowledge of business valuation theory, methodologies and practices is required. A sample case study or actual Fair Market Value valuation report will need to have been prepared within the past year and must be submitted for peer review. Attendance at an optional 5-day training program is recommended, but not required. Three personal and three business references are required, as is passing a comprehensive 5-hour multiple-choice/true-false proctored exam. Finally, an application must be completed and submitted with the required paperwork. After applying for the Certified Valuation Analyst designation, they'll need to pay a fee or apply for NACVA membership, complete required continuing education coursework and meet the Tri-Annual Certification requirements to maintain the designation.

Benefits of using a Certified Valuation Analyst

Obviously, becoming a Certified Valuation Analyst is a lot of work, so why should you hire one to perform your business valuation? The amount of education that is required ensures that the analyst has a great deal of knowledge about accounting and appraisal, giving them the tools they need to get the job done right the first time. Because they've been through such an extensive educational process with a required experience component, the calculations they perform and the methodologies they use in determining business value ensures that your business valuation report will reflect a very accurate value for your company. The continuing education portion means that the analyst will be staying up to date with the latest changes in appraisal theory and practice.

All of these aspects come together in an appraisal professional who is able to develop the right approach to your situation, calculate your company's value based on proven methodologies and is able to back up those methodologies with proven facts as the methodologies used have been tested time and again in a wide range of circumstances. This helps ensure that your valuation report will hold up in legal, insurance, financial and tax circles.

As you can see, the process of becoming a Certified Valuation Analyst is complex and involved, but it produces valuation specialists who can deliver an exacting valuation of your company adapted to your current circumstances. Though you have options in how your business is valued, a CVA is the best way to ensure that those values are accurate and will hold up well to strong scrutiny in a wide range of situations. Using a certified valuation specialist provides you with the best value for your money.

Tags: CVA

What do you need to know about how to sell a business?

Posted by Business Valuation Specialists LLC on Apr 11, 2018 4:03:00 PM

When you started your business, you probably didn't think about what would happen when you were ready to sell. It's easy to get caught up in the daily operations of your business and your long-term goals. But when it's time to look at an exit strategy and consider selling, do you know how to sell a business? Here's some practical advice on how to start the process.

What do you need to know about how to sell a business?

When you're first considering selling your business, you should start by taking a look at your motives. As with most business transactions, you'll want to sell while the market is stable or growing to ensure you get a better price and faster sale. However, it's also important to start the process far enough in advance to ensure the best possible sale at the end of the process. Generally speaking, it takes between two and four years to prepare a business for sale.

One of the first steps you should always take in preparing a business for sale is having a business valuation performed. A business valuation looks at the entirety of your business operations as well as outside factors, such as market conditions and competitors. It provides you with a baseline value for your business, but it's the intel that you can gain that is truly valuable. The level of detail that is reached makes it a great tool for improving your company's financial picture. If it shows problems with your production line, you now know where it can be improved. If it shows issues with bad debts in your accounts receivable department, you can pursue different strategies to close out those accounts successfully.

Once you've started to make improvements, you can start to decide how to pursue the sale of the business. You have a couple options available, either selling it through a broker or going it on your own. A broker will take some portion of the sale price, typically a commission on the sale, but already has a good idea of how the process works, which outlets will provide you with the best outcomes and how to move the process along when it's needed. At the same time, you can focus on getting your business ready for sale rather than trying to sell it yourself. However, if you have the free time or may know prospective buyers in your field, you may want to consider handling the process on your own to avoid having to pay fees to the agent or broker.

However, one area where you won't want to skimp is in document preparation. With the many different laws and regulations varying from location to location and industry to industry, hiring an attorney to handle the paperwork ensures that your interests are protected and that no mistakes are made in the process.

Knowing how to sell a business isn't the first thing on every entrepreneur's to-do list, but it is an important piece of knowledge to have. By knowing when it's time to get out, you can make a more successful ending for your ownership in your company and receive a better asking price during negotiations with a prospective new owner. Even if you're not ready to sell yet, considering the steps involved can help ensure your business is growing at its best potential.

Tags: selling a business, how to sell a business

Why should you insist on working with a certified business valuation appraiser?

Posted by Business Valuation Specialists LLC on Apr 4, 2018 2:29:00 PM

Though there are many reasons why you should have your business valued, working with the right business valuation appraiser is vital to making sure you get accurate results. One of the most important factors to investigate before you hire is whether the appraiser is certified. But why is the certification process important and how can it impact what you get out of your appraisal? Here's a quick look at why you should insist on only working with a certified business valuation specialist.

Why should you insist on working with a certified business valuation appraiser?

Let's look at a couple situations. A business needs to determine the value of their company and has a few options before them. In the first, the business gets an idea of what the company will be worth on the open market based on the determination of a real estate agent. It costs the business virtually nothing beyond a bit of time to get the appraisal completed. However, the final valuation may be based too strongly on the realtor's goals. But how do those goals impact the final value?

The realtor may be short of funds due to slow sales, and therefore suggest a price that is lower than may be reasonable due to needing a fast sale. Perhaps they're flush with cash and want to wait for the perfect buyer for a high commission down the road, regardless of how quickly you want to sell the business. They may not be familiar with the exact nature of your business, so they make a guess based on what little they do know without carefully considering the impact it may have on your bottom line.

Now imagine that the business hires a certified business appraiser. The certification process means that the appraiser hired can look at the exact situation for which the appraisal is needed. If a company needs to determine the value of a business for reasons other than a sale, the realtor's approach can be completely inappropriate. What if a business owner needs to make improvements? Many companies use business appraisals as a starting point to improve profitability and efficiency throughout its operations. Perhaps the business will be changing hands to the next generation and the current owner needs to know what their legacy is worth so they can decide how much of that value is a gift and how much will be needed for their retirement.

What if there's a divorce or lawsuit at hand that requires the business value to be disclosed as part of the proceedings? In many legal situations, the appraiser is required to use a particular methodology to generate the business' value for the court. A simple appraisal or guess at a value by a realtor won't hold up to that level of scrutiny.

It can be really tempting to try to save a few bucks by simply going with someone who doesn't have a certification, it's simply not worth the risk to your company and the problems associated with trying to work with a bad appraisal. By insisting on only working with a certified business valuation appraiser, you can ensure that your business' interests are protected in any number of situations. Fortunately, finding a certified appraiser is a fairly simple process, so make sure when you start looking at appraisers for your business needs.

Tags: business valuation appraiser

What exactly happens during a private company valuation?

Posted by Business Valuation Specialists LLC on Mar 28, 2018 9:37:00 AM

When you're trying to determine the overall value of your business, a private company valuation can go a long way towards figuring out that value. But what happens during the process? How are valuations for private companies different than those for other businesses? Here's a quick look at the overall process and how the different factors and methods can impact your company's calculated appraisal.

What exactly happens during a private company valuation?

When private companies are valued, there are a number of approaches that can be used. For most successful businesses, income or market approaches are typically used to give you the most accurate value for your company. When market approaches are used, the private company is often compared to a similar public company, with adjustments made to the private company's value to make it match the public company as closely as possible.

However, there are still several different approaches even within the data that was available. Here's a quick look at the four main types of methods used when market approaches are used:

  • Guideline Public Company Method - When this type of valuation method is used for private companies, the financial data that is freely available from publicly traded businesses is used. The actual price that investors choose to pay for the minority interests in public companies is used as the basis for the valuation. The public businesses that are used to help determine private business values are typically in the very same or in a similar business as the private business.
  • Guideline Company Transactions Method - When companies that are in a same or similar line of business as the company that is being valued, but it is closely held and not often traded on the open market, this method is used to determine private company value. Generally speaking, both companies will have several similar characteristics. This can include the sector, the business size, the products and services offered and the location where it does business. The transactions of the publicly held company will be used to determine the transaction value of the private company, with more weight given to more recent transactions.
  • Multiple of Discretionary Earnings Method - When a company is just too small for the guideline company transactions method to be used, this method works well. Smaller public companies can have their financial statements adjusted to reflect a private company. It compares public company adjusted earnings into the discretionary earnings to determine transaction value, creating a multiple for the private company's earnings.
  • Gross Revenue Multiple Method - Another method used for smaller businesses, this takes the company's revenue divided by the transaction prices. This allows the appraiser to develop a gross revenue multiple, which is multiplied into the private company's revenue to determine the value. Unfortunately, this method doesn't look at factors such as whether both businesses are profitable, unprofitable or on the same level of profitability.

By understanding how a private company valuation happens, it becomes much easier to understand how your company's value is calculated. It also allows you to see how you can change those numbers by adapting your business practices to the insights you've obtained from the appraisal report. This helps you improve your company's value in the long run and can help maximize the return on your investment when it's time to make an exit strategy.

Tags: private company valuation

What should you look for when hiring a business valuation expert?

Posted by Business Valuation Specialists LLC on Mar 21, 2018 1:03:00 PM

When you're considering having a business appraised, it's quite often only something you have done once in a very great while. In fact, many business owners choose to only have their business value determined during the sale of a business. Unfortunately, that means that many business owners aren't quite sure what they should look for when hiring a business valuation expert. What should you look for in a business appraiser? Here's a quick look to help get you started.

What should you look for when hiring a business valuation expert?

  • Are they a certified appraiser? Many appraisers go through the certification process to help highlight their experience and education. The process of becoming certified can take several months of classes, documentation and similar preparation work. This means that they're dedicated to the industry and are planning on sticking around. The certification process also teaches the appraiser which calculations should be used in which circumstances, with methodologies that have stood up to solid scrutiny in legal, financial, insurance and tax circles.
  • Do they have experience in your industry? Industry experience allows a seasoned appraiser to determine whether the current market situation is a brief hiccup or part of a larger downward trend. It also provides an appraiser with an idea of what a business in your industry should look like, giving them a solid basis upon which to compare your business.
  • What is their past experience? If the appraiser you hire doesn't have a lot of experience valuing businesses in your industry, you may get less accurate information from the appraisal report. Have they come out of a sales position or real estate background, or an accounting background? This may somewhat impact their approach to how your business is valued, but either should be able to provide you with a sound appraisal.
  • Can they provide you with references? Any experienced certified appraiser should be able to provide you with references as to the quality of their work. Don't settle for simple client testimonials, which may be falsified or from a few choice clients who were particularly pleased with the appraisal work that was provided. Take the time to follow up with at least one or two of the provided references to ensure the appraiser has a solid record of good work behind them.
  • Are there any complaints with commerce organizations or review sites? Whether it's the Better Business Bureau, Google, Facebook or any number of other services where reviews can be left, take a look at whether the appraiser has left any bad experiences behind. If the complaint deals with issues that are not related to the appraisal process, such as odd business hours or a difficult to find office location, you may want to ignore it, but if they deal with serious concerns in appraisal practice, you may want to go elsewhere for your business appraisal.

By knowing what to look for in a business valuation expert, you're able to make a more educated selection when faced with several possibilities. This helps ensure that you're making a solid choice that will benefit your company not just now, but also in the future, based on how you choose to act on the information the appraiser provides. Instead of having to guess which business appraiser will be the best fit for your company, you'll now have a better idea of what an experienced, qualified business appraiser looks like.

Tags: business valuation expert

What is NACVA and why does it matter for your business valuation?

Posted by Business Valuation Specialists LLC on Mar 14, 2018 8:46:00 AM

When you're considering having your business appraised, you'll probably hear a lot of new terms. NACVA, the National Association of Certified Valuators and Analysts, provides a wide range of services, including certification, for business appraisers. This designation can make a huge difference in your business when it's time to have an appraisal performed. Here's a quick look at what the Association does and how it will benefit your company in the long run.

What is NACVA and why does it matter for your business valuation?

Originally the area of certified public accountants and business professionals, business valuations have been used to determine a company's worth for several decades. However, prior to the formation of NACVA and similar business valuation certification organizations, the methodologies that were used by these individuals followed a wide range of approaches and calculations. When this information was brought before legal, financial, insurance and tax organizations, it was put through strong scrutiny to ensure the calculations were correct. Unfortunately, in many cases, the value that was calculated was determined to be incorrect, leaving many companies scrambling to provide alternative documentation of their values.

In 1990, NACVA was founded to support CPAs and business professionals in their valuation process. It developed tested methodologies for calculating business values in a wide range of circumstances. Over time, as these methodologies were put through their paces in legal, insurance, financial and tax circles, they were proven to provide the most accurate picture of business values. In the intervening years, the Association has certified over 35,000 financial and accounting professionals, including CPAs and valuation specialists. The majority of that membership, approximately 80%, are certified in one of the Association's three main certification programs: Certified Valuation Analyst or CVA, Accredited in Business Appraisal Review or ABAR, or Master Analyst in Financial Forensics or MAFF.

Where this impacts your company's valuation is in the level of detail and accuracy of the appraisal report that is generated by a certified appraiser. Because of the methodologies that are used, these documents often include vital insights into your company's performance and operations, allowing you to grow strong areas of your business while improving those areas that aren't doing as well. The report will also often include information on your position within your industry, providing you with options for solidifying that position or gaining ground in new areas that have until now been unexplored.

It will also look at your industry as a whole. Is it growing and healthy, or are there areas of concern that may be holding it back? Is it being impacted by digitization or disruption in the market? What are the current projections for growth? Because these aspects will impact your company's performance, they will be taken into account in the valuation report. Intangible assets, such as goodwill and reputation, will also be calculated into the final figure.

By being aware of what NACVA is and how it's certified appraiser members are able to bring more value to your business valuation, you can use that knowledge as leverage at the negotiating table, as insights into your business and industry and many more areas. Working with a certified appraiser ensures that your business valuation has been calculated using standardized methodologies that will stand up well to strong scrutiny in a wide range of areas, including legal, insurance, financial and tax circles.

Tags: certified appraisal, NACVA

How can your company benefit from a small business valuation?

Posted by Business Valuation Specialists LLC on Mar 7, 2018 3:11:00 PM

If you're considering getting a small business valuation, you're not alone. The primary reason small businesses are appraised typically has to do with selling the company or another type of change in ownership, such as passing it to the next generation. But if that's all you use a business valuation for, you're missing out on some serious benefits. Here's a quick look at the many benefits your company can gain outside of the negotiating room.

How can your company benefit from a small business valuation?

It's fairly common for a company to have a business valuation performed when a change in ownership is about to occur. This helps the departing owner know that they're getting a fair value for the business while the incoming owner knows that they're not paying too much for their new business. But the amount of information that is explored during the valuation process makes it an excellent tool to help you gauge whether your company is on the right track and performing up to its potential. How?

The valuation process starts by looking at a company's finances. The appraiser will look at potential transactions that will need to be recorded to normalize income and expenses to reflect the reality of the business, rather than rare high sales and significant expenses that skew your company's financial picture. It also looks at where your company's finances stand overall, giving you a better idea of whether you have a normal number of slow or bad debts from customers or if you need to crack down harder to get paid on time.

Next, it looks at your company's operations.  Is your business a leader in innovation and development in your industry? Is it running efficiently, or are there areas where improvements could be made to optimize your profitability and lower your overhead? The appraiser deals with companies like yours every day, so they can often provide strong, valuable insights into where your operation could be improved to optimize your productivity and profitability.

What about your company's place in the market? That's the next area that is typically explored. Does it have a strong reputation as a thought leader in the industry? Is it unique in particular areas that add value to the products and services you offer your clients? If you do have areas that are similar to competitors, those will be appraised as well as the areas where your company is truly unique.

Then there's the market itself. Is it currently growing, stagnating or shrinking? It's easy to get caught up in what your company has been doing in the market, but it's also important to know where it's going in the future. When the appraiser looks at your industry, they'll take into consideration any professional projections about future growth in the industry.

A small business valuation is a valuable tool that can be used to drastically improve your company's operation, performance and bottom line. However, if you aren't using a certified business valuation specialist for the process, you may be getting the wrong information. The certification process helps educate appraisers as to the proper approaches and methodologies to be used in a wide range of circumstances. Ensure that the money that you're investing in a business valuation is being well spent by using a certified business appraiser.

Tags: small business valuation

What can you do with a business valuation report?

Posted by Business Valuation Specialists LLC on Feb 28, 2018 1:51:00 PM

Though it's common to get a business valuation report when you're buying or selling a company, the type of information contained in a valuation report can provide you with strong insights into your company's overall situation. This makes it much easier for you to explore new options and make smart investment decisions that will benefit your company's bottom line. Here's a quick look at what kind of information is contained in a business appraisal report and how it can help you make positive changes in your company.

What can you do with a business valuation report?

The main thrust of most valuation reports is the overall value of a company, typically researched around the sale of a company. But when the valuation specialist researches the company and industry while developing the report, a great deal of other information has further value. What kind of information is covered in these reports?

Research into the industry is a vital part of the valuation process. The appraiser carefully considers past performance, new innovations and reasonable future projections to determine the type of growth the company may see down the road. This often includes an evaluation of your competitors, helping show where your company is strong in the market and where it is weak. 

Next, the appraiser will look at your company's finances. By looking at your finances as well as that of similar companies, it's possible to determine your business' overall financial health. This part of the process helps you find areas where your company needs work or where it is doing great. As an example, you may have a higher percentage of your business tied up in bad debts from unpaid invoices or a higher amount of capital that isn't being put to work expanding your operation when compared to most similar companies.

What about your company's material assets, equipment and machinery? Most companies prefer to simply use tax-based depreciation to determine the value of their business assets. However, if you have ever invested in high-quality equipment that is continuing to function well and provide value for long after it's been fully depreciated or have hard-used equipment that has failed well before it's been fully depreciated, those values will be inaccurate, painting an inaccurate financial picture. Part of the appraisal includes looking at the condition and determining the real-world value of your assets.

Your operation will also fall under scrutiny when your company is appraised. Are there aspects of your operations that are inefficient or behind the times in terms of beneficial technology? Are you a leader through innovation in your research and development of new products? Is there excessive waste in your production line or job sites? These areas are studied during a business valuation and their part in your company's successes and failures can provide you with strong insights into how you can improve your company's operation and bottom line while maintaining the basis for your company's success.

By getting a business valuation report on your business, you can quickly discover a wide range of benefits, from in-depth insights to market positioning information. However, you'll only be able to get this level of information from a certified business appraiser's report. This is because of the depth of research and solid methodologies that certified appraisal professionals use. Have an appraisal performed and learn where your business can thrive.

Tags: business valuation report