Business Valuation Blog | Understanding Buying / Selling a Company

Whether you own a small business or a conglomerate, many markets and industries have been significantly affected by the pandemic and more currently, the supply chain shortage, resulting in delays of transactions for a multitude of products and services. If your business model has been greatly altered as a result of these unprecedented times, and you are struggling to adapt to the shifting marketplace, consider obtaining a current business valuation to assist in measuring these changes, and developing a game plan for the future.

A certified business appraisal will also provide you a distinct advantage if you are considering buying, selling, refinancing, or taking advantage of available investment opportunities. The ability to manage your business efficiently and successfully, as the playing field changes around you, is critical to the long-term success of your enterprise.

In today’s challenging economy, understanding the true value of your business will allow you to better recognize and capitalize on opportunities ahead of your competitors. It will also help prevent you from making costly mistakes. Regardless of the situation you’re presently involved in, a certified business appraisal will help enable you to make the best decisions on a day-to-day or long-term basis.

The appraiser will walk you through the process and provide insight as to the information needed to measure the overall value of your company with past, present, and future scenarios considered. As you communicate and collaborate through the process, the business valuation expert will determine the best approaches to consider and ultimately weigh, during the appraisal process. Making the most out of an otherwise negative situation, and potentially capitalizing on opportunities in these difficult times, is part of the formula of the successful, and adaptable business owner.

How much is a business worth? This question has plagued business owners for centuries. Unfortunately, the answer to that question, as to so many in life, is that it depends. What are you trying to do with the business? Why are business appraisals needed at that time? Will the current market conditions change the valuation of a company compared to a year from now? How does today's business owner figure out what their business is worth? Here's some quick insight into how a business is valued and the process that is used to calculate that value.

Exactly how do you figure out how much is a business worth?

Determining business value is a complex process. It involves looking at the business' individual practices, market share, goodwill in the community and income levels. It can also involve the market and industry conditions, the urgency of a sale, the perceived value of the company's brand and any number of other aspects that are often dismissed as inconsequential to the business value as a whole.

Part of the calculations are based on why the valuation is needed. If you need a valuation of your business because you're considering expanding and want to make sure you're on solid financial footing first, you'll need a completely different valuation than someone who is having to quickly sell a business to settle an estate due to an untimely death or the dissolution of a partnership or marriage.

Another area that can come into play is the current industry and market. If the business is positioned to take advantage of new technologies or innovations in the industry, the business' value to drastically increase beyond what the business owner may otherwise calculate. If, on the other hand, the business is floundering due to industry changes or poor market conditions, using an older business value may leave you open to risk as you overextend your credit trying to keep up with poor economic conditions.

Simply basing your business value on similar businesses that have sold recently may not give you an accurate view of your business' value either. If the business you are comparing to has a more favorable location, better position in the industry, specialties that you have not diversified into, different income levels or other aspects that impact the business' overall value, you may be under- or over-valuing your business' actual worth. 

Is your business a household name or a newcomer to the industry? This can make a big difference in how reactive your business will be to changes in market conditions. What about your reputation? A good reputation will often improve your business value as your customers perceive a higher value to the products and services you provide when compared to a competitor.

As you can see, the question of how much is a business worth is a very complicated one that requires significant experience to accurately answer. Fortunately, as a business owner, you don't need that experience. A business valuations specialist who has experience in your industry and special area of operation spends their days looking at businesses like yours to determine those values using standardized methodologies developed for specific situations.

There are many different ways to conduct business appraisals. Whether you're hoping to buy an established company and get into business for yourself or sell your company for a fair price, it's important to know how appraisers think about business valuations for industrial companies. 

Pros and Cons of Market-Based Business Valuations

The market-based valuation of a company makes sense for some industries. Consider the owner of a semiconductor manufacturer located in California who wants to sell the company and retire on the profits. If there are other semiconductor companies nearby, then a business appraiser can compare the company that will be sold with others like it, getting an idea of the market share and competitive advantage of the business. This makes sense for large companies over niche companies with a handful of employees. 

The Gross Revenue Multiple Method may work for small industrial companies. In this method, the appraiser takes the transaction price and divides it by the revenue. The appraiser then finds similar companies and determines a multiple of gross revenue, to which the company's revenue is multiplied by to get a business value. This method is simple and quick. However, it is less nuanced than other appraisal methods, and often best for informational purposes. 

Pros and Cons of Asset-Based Business Valuations

The asset-based method can work to determine a fair asking price for the business. An asset approach estimates how much it would the assets would be worth. Subtracting liabilities from assets, the appraiser will come up with a balance. This method works well for companies that have significant physical assets. However, companies that have intangible assets find that an asset-based method may not accurately reflect their worth. Consider the example of an innovative engineering firm. The imaginative engineers who come up with elegant solutions to problems are not captured as a value-add in an asset based approach. If the engineering company were sold to a new buyer, but the existing staff quit, much of the company's true value would be irretrievably lost. 

Pros and Cons of Income-Based Business Valuations

If the semiconductor company has a stable earnings flow, then EBITDA or earnings before interest, taxes, depreciation, and amortization can portray an accurate business valuation. If the industrial business is experiencing an inconsistent period 0 good or bad - the discounted cash flow method may work well. Here, the business appraiser estimates the future benefits of the company, then converts them to present value to come up with an fair market value. When determining how much is an industrial company worth using discounted cash flow, an appraiser can come up with a stable and fair value for the business even though circumstances are irregular. 

Ultimately, a qualified business appraiser should be able to determine which method makes sense for the given company at a given point in time, correctly calculate a company valuation, and explain the process to key stakeholders. Given what's at stake, it's critical to hire a qualified appraiser who understands the industry.

When your business is thriving, it's easy to get caught up in the rapid pace of a successful business. But we've all seen situations where a very successful business suddenly failed because the managers and executives didn't know valuing a growing business was important to stave off problems that would show up down the road. How does the valuation of a company help your growing business remain successful? Here's a quick look at how business appraisals can be used to develop dynamic insights that assist comprehensive business planning.

Changing Values: How Valuing a Growing Business Helps Monitor Growth

A company valuation provides insight into your business' growth through a few different mechanisms. These mechanisms look at your business' internal values, comparisons to similar businesses and across the industry as a whole. Here's what the appraiser is looking at:

The Business Itself

Your business is unique in its own way. It has different practices than other businesses. You have specialized knowledge for getting the job done. A good business appraiser is aware of that and will  look at your entire business. Because a professional appraiser only works on valuing businesses, they can tell you where you may not have enough cash in the business, too much of your assets tied up in equipment or whether the investment you're making is a great deal or a terrible risk because of the cash flow situation.

Comparison to Other Businesses

How does your seafood restaurant compare to others in the market? Because business valuation specialists spend their time valuing businesses, they can quickly see factors that you're not taking into account. How does your revenue and earnings stack up against similar companies?  

Statistical Comparisons

A good part of this process is using ratios to compare your business growth to that of other businesses, both locally and across the country. They can be used to determine ROI on both assets and equity. They can also be used to calculate safety and liquidity, a current ratio, a quick ratio, debt to equity and sales versus working capital, along with others.

Industry-Wide Comparison

There's also a focus on the industry as a whole. Even if you're still selling oil pipeline, the oil industry may be going into a serious slump. That means you could be facing a cash flow and market crisis shortly. A good business appraiser will look at the industry as a whole and your part within it to help you project where your business will be going in the future. 

As you can see, valuing a growing business gives you great insights into what you need to do to continue that growth curve. But don't use just any appraiser, make sure you're working with a certified business appraiser who has the experience to calculate a comprehensive business valuations for your business. Don't have one to work with who is familiar with your industry and experienced in the type of business appraisals you need done?

Imagine that the day has finally come to sell the family farm. Do you know how much your farm might be worth to young farmers looking to buy a working farm? If you set the value of your farm too high, no one will buy. If you set the value too low, you leave money on the table. Learn business valuation methods that work for farms to ensure you set a fair asking price when selling your farm. 

What Method to Use for Valuating a Farm? 

There are many ways that you can take the value of a farm prior to a sale. Here are a few methods that are commonly used when evaluating farm values: 

• Net worth - Many farmers are used to taking the net worth of their farm every year. Yet a net worth gain only measures an influx of cash, and does not account for the value of the land. Net worth can be used to demonstrate the farm's return on equity, and show how productive the farm is compared to others like it. However, net worth alone is not very useful when taking the valuation of a company prior to a sale. 
• Discounted earnings method - Another method that's commonly used for farm valuations is the discounted earnings method. In this method, an appraiser will calculate the value of expected future earnings in today's dollar. This method is often used with businesses that, like farms, may have inconsistent earnings from year to year. If your farm has a lot of anticipated cash flow, it could be seen as a hot commodity on the market. 
• Market value - It may be useful to directly compare your farm to that of others near you for sale, by taking a market approach to company valuation. In a market value approach, you might find several farms that offer the same products, are roughly the same size, and are in comparable locations.
• Asset approach - In some cases, it might make sense to use an asset based approach to tally the total value of assets on the farm. Farms tend to have a lot of expensive machinery and heavy equipment, such as tractors or combines. Anyone who buys the farm assumes possession of these valuable assets, so it makes sense to include their monetary value in the farm's worth. It can make sense to value your assets if you want to see them separately from the farm; say, at a machinery auction. An equipment appraisal may also be suggested.

Since the valuation you set for your farm has an immediate impact on how much you stand to reap in a sale, it's in your best interest to have the farm professionally appraised. You may want to do this a few years before you plan to sell the farm, so that you have time before the sale to make improvements that increase the farm's value. 

An appraiser who has experience with the farming industry can examine your farm, determine the appropriate method or combination of methods to use, and complete the appraisal for you. Then all you need to do is advertise the farm for sale.

When you are trying to determine the valuation of a company, one of the most important things that comes into play is the approach. Because business valuations are sought for a wide range of reasons, from selling to divorce to mergers, the approach must be customized to the particular situation. In this piece, we'll take a solid look at different approaches to determining company valuation and in which situations they're typically used. 

Different approaches to determining business value

Asset-Based Approach

Though asset-based business appraisals may seem like a good route to explore, they're typically only used in liquidation situations, not by healthy businesses planning on managing risk or expanding. Why? Because if you've spent years building your business and establishing a good reputation in your industry and region, you know that your business is worth much more than the sum of its parts. Asset-based approaches only figure the minimum liquidation value of your business assets instead of looking at the value of an established business in the community or the goodwill that it has created. For this reason, we virtually never used asset-based methodology to determine business value.

Income-Based Approach

An income-based approach uses the current value of future income to calculate a business appraisal. It looks at what the income has been in the past and projects it out for a period of years. The most common methods in this approach are capitalization of earnings and discounted earnings, also referred to as discounted cash flow.

• Capitalization of earnings takes into account the business earnings and is mainly used when results are steady.
• Discounted cash flow looks at the expected future business earnings putting more weight in near years versus out years.

Market-Based Approach

By comparison, the market-based approach looks at substitution. The appraiser looks at how much similar businesses have sold for, then adjusts the sale price on the differences between your business and the ones being analyzed. Because the businesses have things in common being in related industries, it is a good method to see what actual acquirers pay.  The most commonly-used methods are as follows:

• Guideline public company looks at a similar public company compared to your private company. If you are valuing a small business, this might not be the best way to compare entities.
• Guideline company transactions take similar companies with similar transaction levels and then adjust for any differences. The transactions are then applied against a multiple to determine the value of the company.  Databases provide details of small business transactions.
• Multiple of discretionary earnings looks at similar companies and what kind of discretionary earnings they make, then adjusts it to the company being appraised to determine business value.
• Gross revenue multiple looks at the gross revenue of similar companies and adjusts it to the company under appraisal, then uses a multiplier to determine value.

By knowing the different approaches, you gain a better understanding of how valuations work and why your appraiser is selecting a particular method.

When you operate an industrial company, you face unique challenges and benchmarks compared to other businesses. Overhead, fluctuating supply and commodity costs, labor issues, specialty machinery and production requirements - it can be a real challenge to keep your business operating profitably. But how do those differences translate into the valuation of a company? Here is some insight into industrial business valuations and how they're different from other business appraisals:

Common differences in valuing an industrial company

Manufacturing companies are often valued using a methodology that focuses on assets or income potential. But there are a few different areas to consider instead of simply adding a few figures together.

Assets that produce income must be identified, because industrial companies have a lot of equity tied up in assets. Equipment that must be specially tooled or specific requirements for operation may have additional costs and lower equity. Beyond material assets, what about intellectual property and brand goodwill that have been developed over the years? What about plant capacity that is not being used fully? Those assets can also provide a generous amount of equity that is not being considered in many situations.

At the same time, prospective capacity and production doesn't guarantee income. This requires a fine touch on the part of the company valuation specialist, to determine what a likely future income would be without overstating things. Is your company adding innovation and upgrades to your products? If you aren't, obsolescence can quickly reduce potential income.

Have there been sales forecasts made in the past? If they fell short of the forecasted expectation, they will need adjustment to better represent future income. This can include removing accounts receivable that are far out on the aging report and are expected to be uncollectible. Is the inventory current or does it need adjustment to reflect current market conditions? What kind of transaction are you preparing for? This last one will make a great deal of difference on your final valuation, as a company that is solvent but facing a divorce has a very different process than one that is going into a solid expansion phase.

What about liabilities? Is your accounts payable up to date with all payroll and taxes accounted for? Are there any outstanding loans that need to be repaid? What about the cost of complying with regulatory agencies? Though this may seem a bit intensive for businesses that have not had business valuation services performed in the past, they provide a more realistic look at the numbers and whether the business is operating at a sustainable level. 

What is the market doing as a whole? Are suppliers expected to remain stable and at the current cost forecasts? Are there more than one supplier available for those materials? What about the industry? Is there still a demand for that product and is the company's reputation for innovation part of its brand goodwill? All these factors will play into how successful a business will be well into the future and will help the appraiser determine the right method for valuation.

By getting a valuation of your industrial company, you're helping to ensure it will remain successful down the road.

One of the biggest questions when an owner realizes they need to discover the valuation of their company is what is business valuation? Because it can seem a confusing set of terms and processes, business valuations are one of the least understood tools available to a business owner or executive. We'll explore what business valuations are, why they are important to your business and what to look for in a good valuation firm.

What is Business Valuation?

In its simplest format, business valuation is the process that determines the value of a company. It's the same as an appraisal. But beyond the most basic concept, business valuation, when done correctly, can tell you any number of things about your business and whether particular actions are a good idea at this time or if they should be put off until some issues are resolved. 

Business valuation is used in sale or merger negotiations, to argue taxes with more accurate values, to obtain financing for an expansion or new direction for a company or as legal proof of value in court cases. These reasons aren't unique to the United States. Business valuation also takes place in other countries around the world for most of the same reasons.

Why is Business Valuation Important?

Business appraisals are important because they help you make good decisions for the future of your company. If you're considering selling your business, do you know what it's worth? Is the new market you're considering entering a good risk for your company at this time? Where is your company weak and needs improvement? All these questions can be answered with a quality business valuation.

Business valuations also help prove your company's value to other entities. If you have had a loss because of a fire or natural disaster, a business valuation shows what has been lost in terms of assets, potential sales, goodwill and similar concepts. If you have to get financing, it proves the value of based on a level of anticipated cash flow. It can stand up in a court of law, but only if it's done correctly.

What Should I Look for in a Qualified Business Appraisal Company?

Fly-by-night appraisal companies don't really provide any serious value. They show up, create a report and when they have a few complaints because their reports won't hold up to scrutiny, they disappear again. Obviously, that isn't what you need when you're spending good money to have a company valuation performed.

A qualified company valuation firm can provide references, is available for discussions by phone, and uses standardized methodologies to generate the business appraisal report. Their appraisers are certified by one of four accreditation organizations: the American Society of Appraisers, the American Institute of Certified Public Accountants, the National Association of Business Certified Valuation Analysts or the Institute of Business Appraisers. Because the appraisers have been through significant training to receive these certifications, they follow recognized methodology when preparing their reports, which will hold up well to scrutiny.

Now that you have a better idea of what business appraisals are, how they can help you with making wise business decisions and what a good valuation firm looks like, it's time to take action.

Do you know how to determine the value of a business? Most business owners don't, and it opens up their business to unnecessary risk and causes them to leave money on the table during negotiations. The valuation of a company is a valuable tool that tells you where your business is strong and where it is weak. Business appraisals help tell you when you can take advantage of an opportunity without risking everything. Here are the different options to keep in mind when getting a company valuation.

Different Options for How to Determine the Value of a Business

So what are the different options available for how to determine the value of a business? It depends on your purpose. If you're just trying to get a ballpark figure, comparing your casual restaurant to the recent sale price of a similar business in your area, it might give you a general idea. You could also speak to someone that sold their business to try to get an idea of what your business is worth. But if you plan on using your company appraisal for any serious business purpose, you'll need to have the valuation of a company determined by a qualified, certified business appraiser.

Why are the first few options not as solid? If you're comparing to a neighboring business, you may not be taking into account important details. Though the businesses may seem very similar, you don't want to leave money on the negotiating table, especially if the owner was desperate to just get out of the business and didn't get nearly what the business was worth. In the second option, business owners may want you to think that they sold their business for more than what they really did.  Others may not truly understand earnings and multiples and give you misunderstood information. 

Why it's Important to Use a Qualified Business Valuation Company

The third type of business appraisal uses a qualified valuation firm. Why? Because a certified business appraiser knows how to put together a business valuation report that will stand up to strong scrutiny. The process of certifying as a business appraiser and building a reputation as a quality business valuation company takes time and effort. A certified business valuation specialist backs up their calculations with facts because they use a standardized methodology that follows the national accredited standards.

For this reason, the reports they produce will hold in court. They give you a position of strength to negotiate from when you're negotiating a business sale or merger, which ensures you get to walk away with everything your business is really worth. They provide proof of value, whether it's for an insurance claim from a significant loss, fighting a property tax assessment that is just not realistic or to secure financing for a new opportunity you're pursuing. They also provide you with information on the strengths and weaknesses of your company, allowing you to build it up into the kind of enterprise it can become.

Now that you know different business appraisal options and where to get proper business valuations performed, it's time to take action. If you're not currently working with a business valuation firm, please contact us. Our certified business valuation specialists are ready to help you discover the true value of your company to help you make it stronger.

Whether you're approaching your retirement years or are just plain bored about the direction your business is heading, the sale of a business is something every entrepreneur considers at times. But do you know how to sell your business successfully? We've taken a look at several entrepreneurs and determined what they did right to maximize their business' profit potential during a sale.

How to Sell Your Business the Smart Way

1. Determine why you're selling your business. If you want to sell your business because you're bored or are ready to retire and the economy is in good shape, you're probably okay starting the sale process. But if you're trying to sell because your market is slow or your business is not financially successful, you may want to fix the problem first to ensure the best result. The first question of most buyers is why you're selling your business.
2. Plan the sale ahead of time. And by ahead of time, we mean a year or two ahead of the planned sale. This gives you the opportunity to evaluate why you want to sell the business and take care of any loose ends so that you can maximize your profits. Having an early business appraisal performed helps you determine where your company needs improvement prior to the sale.
3. Get a quality business valuation performed. When a valuation of a company is completed, you have a much better idea of what that company's strengths and weaknesses are and can make adjustments to create a more enticing package. Good business valuations are often a base point from which you can determine an asking price and support your side of the negotiating table. 
4. Decide whether you should or shouldn't use a broker. If you already know who your company will be sold to, such as an employee or family member, you can probably skip paying the broker's fee. But if your company will need to be advertised and listed, a broker can save you time, money and aggravation by taking care of business while you make sure your company is ready to go. 
5. Get your paperwork in order. This doesn't just mean your accounting, though that is a big part of it. Get your past three or four years of taxes together, more if your business has had irregular income over the years. Gather your maintenance and repair logs for your machinery so a prospective client can see that the equipment that comes with the business is in good condition.  If you had a machinery & equipment valuation or other appraisal completed, get them ready to share as well.
6. Find the right buyer. The sale process doesn't stop just because you have one buyer - you'll want to have two to three buyers lined up, preferably pre-qualified for financing. If you're considering offering owner financing on the business purchase, you need to have a lawyer look over the offer and paperwork you're planning on using so you're ready to go.
7. Determine what to do with the profits. Before you spend your profits, take some time to consider what you'd like to achieve financially with it. You'll also want to talk to a financial advisor to make sure you're not hit with any tax penalties later on.

Now that you know how savvy entrepreneurs do it, it's time to follow their footsteps in how to sell your business to make your the sale a success. Take the time to work through the steps and you'll see significant success. If you're looking for a reputable company to perform a quality business valuation, please contact us. We're always happy to help make your business a success.