Business Valuation Blog | Understanding Buying / Selling a Company

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

A Brief History of Valuation Companies

Posted by Business Valuation Specialists LLC on Nov 9, 2016 8:30:00 AM

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Though there is no specific date where we can look at say, "This is the start of business valuation," knowing the history surrounding the development of business appraisals and how this specialized branch grew out of accountancy and appraisal services is helpful to understanding how today's changing market conditions can affect the valuation of a company today. Business valuations can be a complicated topic, but valuation companies have grown out of the demand for better accountability and finer margins in business to maximize productivity. Here are a few short paragraphs on where valuation companies have come from, how they have developed into the complex but extremely accurate reporting systems we see today and where they may take us in the future.

A brief history of valuation companies

Though there is some debate as to the exact time period when the first valuation company or service emerged, it was undoubtedly in the middle of the 1800s as the Industrial Age saw the growth of immigration and larger companies began forming as technology advanced in communications, transportation and climate control, and made it easier for workers to perform more uniform tasks. As these companies were sold, accountants and actuaries were first called upon to study the financial documents of the day to determine their accuracy and the value of their projections. Starting on the east coast of the United States, the Massachusetts legislature passed a law in 1858 that required a commissioner to calculate the potential reserves of policies for all companies in the state that required licensing, to ensure that they were properly covered if needed. 

The original methodology used was the Net Level Premium Reserve Method and the combined experience of the companies, based on the 1843 British Mortality Tables and an average interest rate of 4%. Since that time, the basic methodology has not changed, only which inputs, risk factors and range of information is used to calculate the final company valuation based on their exact circumstances. Later, as the formation of the IRS required better tax accountancy and the 1920's brought about prohibition, the tax breaks and compensation paid to the major breweries and similar businesses by the U.S. Government created the right circumstances for another viewpoint to form. This revolutionary concept was that a company was actually worth far more than simply its assets minus its liabilities or only its equity, the main calculations that were used to that point. This development brought about new concepts including the value of future profit and goodwill in calculating company valuation. 

Up until the 1990s, the work of calculating business value was strongly done by accountants and actuaries, but the development of the internet and the Information Age further narrowed this specialty until business appraisers were able to strike out under their own banner. The National Association of Certified Valuators and Analysts was begun in 1990 and has organized these previously diverse valuation specialists under one united banner, which continues to this day.

As our world and markets continue to diversity, we can expect to see further specialization of business appraisal firms as time goes by. Because business valuations allow you to see exactly where your assets and liabilities are, they are vital to the continued growth of your company and will become a necessary partner for successful companies worldwide as time progresses.

Tags: Business Valuation, history of valuation companies

4 Business Valuation Resources to Help You Understand the Process

Posted by Business Valuation Specialists LLC on Oct 19, 2016 11:30:00 AM

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When you're entering the world of business valuations, there is so much to learn! Whether you're stuck with terminology, need a better grasp of the different methodologies used and why they apply to each situation or just want a better idea of how the valuation of a company is undertaken, these fabulous business valuation resources will help you quickly understand the complexities of business appraisals so you can use these tools to the best advantage of your company:

4 Business Valuation Resources to Help You Understand the Process

  1. Business Valuation Resources (http://www.businessvaluationresources.com/) provides a little of something for everyone. Whether you're a seasoned business veteran who is looking for the latest industry intelligence to determine how it will affect your business' appraised value or are just starting to learn how business valuations can help get your business off the ground and make it more successful, this website has a wide range of topics dealing with business valuation.
  2. Valuation Resources (http://www.valuationresources.com/) is an excellent site to investigate if you want to find out more about how the valuation of a company in your specific industry is typically undertaken or how it has been affected by recent changes in the market or methodology used to calculate business appraisals. It also has some great resources for exploring different methodologies used in business valuation, including transaction date on similar businesses and the often misunderstood concept of multiples.
  3. AICPA's Business Valuation (http://www.aicpa.org/) gives you a good glimpse at the kind of information certified business valuation specialists work through on a daily basis. As one of several accreditation organizations, the AICPA provides information on their site that both veteran and newer business appraisers work with on a daily basis, giving you some insight into how the process works and why particular approaches are taken to your business valuation appraisal.
  4. Business Valuation Law (http://www.businessvaluationlaw.com/) covers the legal side of business valuation. For certain situations, there's actually law in existence about what type of approach must be used, such as in a divorce or hostile partner buyout. This site covers some of the latest changes in business valuation law and how new laws may intersect with business valuation in expected or unexpected ways.

Now that you've had an opportunity to gain a better grasp of company valuation through these business valuation resources, it's time to start applying this knowledge to your company's benefit.

Tags: Business Valuation, business valuation resources

Partnership Divorce: Using Business Valuation for a Fair Deal

Posted by Business Valuation Specialists LLC on Sep 7, 2016 2:00:00 PM

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When you are considering a "divorce" from a partner, it can be very messy trying to figure out an equitable solution to dealing with your business, especially in community property states. Both sides want to benefit from the deal, and it can be hard to find a solution that everyone can live with, especially when one or both of the spouses want to continue working in the business and the parties are not willing to work amicably towards an agreement. But a divorce business valuation can provide a quality valuation of a company that uses standard practices by a qualified, impartial appraiser to determine a fair value and a fair deal for all concerned. Here's how getting a company valuation works in a divorce works and the specifics of which valuation methods are used in this situation.

Using a Business Valuation to Get a Fair Deal in a Partnership Divorce

  • It's important that you get your valuation of a company through a qualified, certified business valuation appraiser. Because a professional appraiser has gone through the training and nows the appropriate standards to use in your situation, doing so will help you avoid spending money on an appraisal from an untrained person that may not hold up.

  • One method often used in business valuation is the market approach when looking at comparable businesses. By taking into account different business attributes and investment risks, it's possible to develop a comprehensive valuation that is fair and equitable to all sides in the business.

  • Though it's common in non-adversarial situations to use a comparable transaction method under the market approach, the most common data source only go back a single year, but doesn't address prior years. Because a seller in non-adversarial situations is often actively trying to paint a good picture of the business income to get the most out of the sale, this approach doesn't work well in a partnership divorce business valuation.

  • When a qualified business valuation appraiser is used, it's easier to find an equitable solution to the problem. This is especially important in situations where there are allegations that one party has not been running the business honestly. Because a qualified valuation specialist can study the figures that play into the business' final valuation, it's easier to locate potential problems or mis-reported figures.

Though partnership divorces are, by nature, painful and emotional, coming to a fair and equitable valuation for your business doesn't have to be.

Tags: Business Valuation, divorce, partnership

How Business Valuation Can Help You Sell Your Healthcare Practice

Posted by Business Valuation Specialists LLC on Aug 10, 2016 12:30:00 PM

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Smart businessmen and women understand that it is important to consider selling a business before the day arrives. Yet all too often, medical professionals -- from wellness providers and holistic health care providers to medical and dental practitioners -- do not have an understanding of key business concepts that can help sell their practice. Learn how to value a company and why you need to do this before you put a medical practice on the market. 

How to Value a Company in a Medical Field

There are many different company valuation methods that a business appraiser might use to value a company. Commonly used methods include the asset, income, and market approach. 

Asset-based company valuations focus on the value of business equipment and assets. If you have a lot of modern specialized equipment, such as x-ray and diagnostic imaging machines, then an asset-based approach may benefit you. 

An income-based approach may examine your cash flow or take capitalization of earnings. The latter method works well for established, stable businesses such as an orthodontist office that has a demonstrated pattern of regular patient growth over time. 

A market approach might compare the medical business to those similar to it, or use multiples of growth revenue. This approach works best when there are similar businesses in the community to compare your medical business to, and does not work as well in rural areas. 

While you do not need to know the fine details of these different methods, it is helpful to understand the basics so you can review your appraisal report. After the appraisal, you may decide to make strategic business investment to grow the value of your company before a sale, especially if the sale you anticipate is far off. 

A business appraiser can discuss your needs, your business history, your growth, and your reasons for selling the business. Based on the information gathered, the appraiser can then select the right approach or combination of approaches to obtain a fair market value for your business. 

Why You Need a Business Appraisal for a Healthcare Practice

If you try to sell your healthcare practice without getting an appraisal first, you risk setting yourself up for a frustrating experience because you do not understand the true fair market value of your company. You might be sentimental about your company and set a price too high to receive an offer. Alternately, you may undervalue your business due to personal fears and end up selling the company for less than you deserve. 

Knowing the valuation of a company, you can understand its unique selling points and better market your medical practice to new dentists, doctors, or health and wellness experts. You can decide if you want to sell the business as-is, sell equipment separate from the business, or sell your practice separate from real estate. You might retain building ownership and transition into being a landlord renting office space. 

If you are considering selling your practice to a hospital, as is common at the present, you may want a business appraisal as a form of leverage. When you know your practice's value, you are in a better position during negotiations. 

At Business Valuation Specialists, we perform business appraisals for a wide range of companies, including medical practices. Let us take the lead in your business valuation, so you can sell your medical business for a fair price. 

Tags: Business Valuation, sell your healthcare practice

How Valuing a Manufacturing Company Reveals Hidden Value

Posted by Business Valuation Specialists LLC on Jul 20, 2016 11:30:00 AM

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When you run a manufacturing company, there are many areas where you can make improvements or tap into additional value. Some of these involve taking risks in entering new markets, doing extensive mapping of your strategy or planning your actions in the market when you're not sure what the future may hold. But one of the most under utilized tools used for finding hidden value in your business is the business appraisal. Business appraisals look at a wide range of factors to determine a business' true value. It also makes it easier to find where your business has potential for significant growth. Here's how having a business appraisal performed helps you find that hidden value.

How valuing a manufacturing company reveals hidden value

The first area you'll find value is where your business is not performing up to standards. How is that adding value? Because it helps you ensure your company is as strong as possible. This allows you to improve your business, building its value. Are your assets overvalued because they receive more wear and tear than your competitors? Is your overhead too high because you haven't replaced the old, power-hungry light fixtures in your plant? Is there disruption happening in your industry that may lead to a downturn for more traditionally-modeled businesses? By knowing where your business is weak, you know where to improve it to ensure it will do better in the future.

But how do you compare to your competition? Because business valuation specialists spend their days working with a number of businesses in your industry or related industries. This gives them the insight to what a healthy manufacturing business looks like. They can compare your business to others that are similar or to similar businesses in other industries that are going through the same type of conditions and issues your business is facing. Is it a good time to diversify your production line? Should you look at digitizing your operation to reduce overhead? Having a business appraisal means you can learn from other business' mistakes and successes.

When you're considering expanding your business by merging with another company, do you know the condition that company is already in compared to your own? A company valuation of that business provides the same level of insight. If that company is strong where yours is weak and vice versa, they may be able to compensate across the board and make the merger a success. If, on the other hand, you're looking at a business that has similar weak points, you could simply be taking on unnecessary risk that could cost you your existing manufacturing company. By having a business appraiser take a solid look at both companies, you know what you're getting into from the start or can avoid making a bad investment all together. 

As you can see, there are many areas where your manufacturing company has real value that may be hidden. By taking advantage of the information provided in business valuations, you can improve your business' position in the market and take smart opportunities. If you need help getting the valuation of a company, it's important that you work with a business appraiser who has the necessary training and experience to give you the information you need.

Tags: Business Valuation, valuing a manufacturing company, appraiser

Maximizing Production: Valuing a Manufacturing Company

Posted by Business Valuation Specialists LLC on May 18, 2016 12:00:00 PM

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When you work in manufacturing, you often work with numbers on a daily basis. Specifications, supply costs, overhead: these numbers are very important to the daily operation of your company. But what about valuing a manufacturing company? There are many benefits to having business appraisals performed on your business for a wide range of reasons. One area where manufacturing companies see real results from business valuations is in reducing overhead and production costs through a solid look at where your company is strong and where it is weak. Here are some ways  business appraisal helps:

Maximizing Production: Valuing a Manufacturing Company

Improving Production and Operations

One of the first areas where you'll find room for improvement in your business is through a solid study of business operations. An experienced business appraiser can provide insights into where your company meets the average, where it excels and where it is lacking. Because a business appraiser looks at specific parts of your business, they can quickly determine, for example, if your company is losing money in excess manufacturing waste, inefficient machinery that uses too much electricity or material and whether you're paying too much in property taxes due to a poor assessment by your local tax assessors office.

Improvement in Management and Accounting

Another area where there's room for improvement is in management. If your company is relying on tax accounting records to estimate value, assets and equity, you may be selling yourself short. Tax accounting often depreciates value for a piece of equipment over a specific period of time. If your equipment is failing before that point, you're not getting the full depreciation out of it and you may be overestimating your assets, because the machine is not worth its depreciated value. On the other side of the coin, machinery that is lasting significantly longer than the depreciation period may still have value when the books report a zero value. That means you aren't able to take advantages that come your way, because you don't think your assets are high enough to cover the potential risk. In either case, a business appraisal allows you to determine when to replace vital equipment, providing better budgeting intelligence.

Projecting Income and Market Growth

But what about income? When you're getting ready to expand your manufacturing operation, being able to project your expected income is important both in assessing the risk and in obtaining financing. A certified business appraiser can quickly determine your projected business income based on past income. Though this is easier to calculate when a business has regular income, it can also be estimated for irregular income. A business appraiser also has the knowledge to look at current market conditions and account for those potential disruptions in their calculations. This means when your industry is expected to do well for a period of time, the appraiser takes that into account.

As you can see, valuing a manufacturing company can provide great benefits and insights into how your business works and where it needs improvement. It also provides proof of value for any number of other purposes, from financing to insurance to sale value. If you need to get the valuation of a company, please feel free to contact us today to be paired with an experienced certified company valuation specialist. At Business Valuation Specialists, our job is making sure your business appraisal is completely accurate to your unique situation.

Tags: Business Valuation, how to value a manufacturing business

Death and Taxes: Preserving Your Business Through Estate Planning and Taxes

Posted by Business Valuation Specialists LLC on Apr 27, 2016 10:00:00 AM

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Our world has two things you can always count on: death and taxes.  Unfortunately, many people are unwilling to discuss end of life planning, whether it's those who are faced with health problems and their own mortality or those who will be left behind who do not want to discuss the loss of a loved one. But failing to put a plan in place to deal with this eventuality can leave your business open to serious problems, including insolvency from death taxes. When it comes to estate planning and taxes, it's vital that you take the time to determine the value of a business before the time of need so that you can plan for financial methods that will ensure the continuity of your business. 

Death and Taxes: Preserving Your Business Through Estate Planning and Taxes

What exactly does the valuation of a company have to do with estate planning and the taxes that are incurred when a business is passed to the next generation? Quite a lot, as it happens. Business valuations provide a legal basis for the value of a company, allowing taxes to be charged based on the company's actual value instead of an incorrect estimate based on tax accounting. It also helps you determine areas where your company is strong and where it is weak, allowing you to get it into shape before worrying about passing on your legacy. By getting a valuation from business appraisal specialists, you can ensure that you have some financial means in place to deal with taxes that will fall into play at the time of death. Here's' a little more on each of these areas:

  • Legal basis: By having a company valuation performed by a certified business valuation specialist, you can ensure that your company's value will hold up in court. A certified business valuator has gone through a vigorous training process to ensure they're using the proper methodology to value your company. Because the national accreditation organizations have certified these methodologies, the business appraisals that are calculated using these methods hold legal weight.
  • Strengths vs. weaknesses: A business appraisal looks at all aspects of your business and can help you determine where it is strong and where it needs work. Because the first few years of independent operation can be somewhat rocky for new business owners or even for those who have experience in the company but are taking the reins for the first time, having your company operating in a position of strength at the time of transfer can help ensure your company remains solvent and your legacy remains intact.
  • Estate Planning: Part of estate planning means planning beyond the death of the current business owner. In its most basic, estate planning should include contingencies for taxes that will come into effect at the time of death, when a business passes to your heir. What legal challenges will they face? Have you outlined who you're leaving your business to? What about taxes that will come into effect? A good business valuation allows you to work with an accountant to estimate the amount of death taxes and set up contingencies to ensure those taxes can be paid.

Though estate planning and taxes are a delicate subject, it's important that you look at having a quality company valuation performed to ensure that your legacy will live on after your passing. If you haven't had a chance to have a quality business valuation performed, please feel free to contact our valuation specialists to ensure you have the information you need to properly plan your estate.

Tags: Business Valuation, estate planning, taxes

Why a Valuation is Important When Selling a Business to a Third Party

Posted by Business Valuation Specialists LLC on Mar 16, 2016 10:00:00 AM

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When you're selling a business to a third party, the topic of business valuations may arise. But why is a business appraisal important when you're selling your company, and what difference will it make at the end of the day? As it turns out, the valuation of a company is one of the key documents that several parts of the process revolve around. Here's why:

Why a Valuation is Important When Selling a Business to a Third Party

When you're selling a business to someone you don't know, you want to make sure you can get everything you have coming out of the business into which you've put so much of yourself. A quality business valuation is the first step to ensuring that happens. By having a company appraisal performed, you can see any areas where your business needs improvement, whether it's getting a few pieces of machinery repaired or improving your facilities to make them more welcoming to customers. At the same time, you'll learn where your business is already strong so that you don't have to put further effort into areas that are already in excellent shape. Once you've made the changes and improvements, your business should have increased in value, allowing you to see more benefit from your actions.

The next step is to list your business for sale and entertain offers. If you're like many business owners, you know that your business should be worth more than the assets on the balance sheet, but probably don't know what that figure actually works out to be. By having a business appraisal in hand, you have a much better idea of what that figure should be, and so you can consider offers that are reasonable while dismissing those which are not. You can also decide between appraisal methods, whether you want to ask a price that is in line with similar businesses in your market or if you feel you have a unique position that should be accounted for and request that the appraisal reflect future income from your current business.

But don't feel that you need to snap up the first offer that comes along that is within your acceptable price range. If there is still a significant difference between the offer and the appraised value of your company, having a company appraisal helps you at the negotiating table. Because a company appraisal is based on a standardized methodology, it represents the very best of appraisal practices and procedures, even holding weight in legal, insurance and financial circles. If you want the other party to come up in price, providing them with a copy of a certified business appraisal report may make them aware of facts and circumstances about your business they may have previously been in ignorance of. This then gives them a chance to either change their initial offer or meet a counteroffer you've proposed to them during negotiations.

Business appraisals are vital to your success when selling a business to a third party. If you're getting ready to sell your business and haven't contacted a business valuation firm, please feel free to contact us today. Our qualified business appraisal specialists are ready to help you get the maximum benefit from your business sale.

Tags: Business Valuation, selling a business

How Valuation of a Business Provides Legal and Financial Documentation

Posted by Business Valuation Specialists LLC on Dec 22, 2015 9:30:00 AM

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When you're in a professional field, you may have clients who provide a valuation of a business as part of their documentation for financial transactions or legal cases. But have you thought about how the valuation of a company holds up in terms of legal documentation? Business valuations are a complex process that is often poorly understood by those outside the company valuation field, so here's your guide to how properly qualified business valuation specialists document the valuation of a business using standardized methodology.

The Financial Field

When financial experts consider what a business may be worth, they look at a lot of different factors. Whether you're considering investing in a business directly or work at a financial institution offering business loans or cash-flow solutions, knowing exactly where a company stands financially helps you make better decisions in approving or denying funding. If you base your decision on the business' tax documents alone, you may be receiving a limited picture of the business' finances. As an example, tax documents require depreciation of an asset, often over a fixed period of time. But what if your prospect has purchased the best equipment for the business and maintains it impeccably? The equipment may have no value at the end of the depreciation period according to tax records, but may still be worth a great deal on the market. This creates a false lowering of the company's true financial prospects.

The Legal Sector

Where do business appraisals tie into the legal sector? In many court cases, the value of a business is called into account, whether it's for the settlement of an estate, a messy divorce or a liability lawsuit. Because certified business appraisers follow standardized methodology, their business valuations are usually taken at face value, helping you avoid hours of back and forth negotiating to a fair dollar figure.

Having a solid business appraisal documented helps make your job easier when your clients already have their documentation before anything major happens in their business lifecycle. Now that you know what a great tool business appraisals can be in documenting your clients' business concerns, you can recommend that they take action by getting a valuation of a business performed. At Business Valuation Specialists, we have many appraisers who have earned the Certified Valuation Analyst (CVA) designation provided through the National Association of Certified Valuators and Analysts (NACVA), which means they use well-documented, legal methodology. Contact us today for more details about our program and how we can help your clients protect their business interests.

 

 

Tags: Business Valuation, valuation of a business