Business Valuation Blog | Understanding Buying / Selling a Company

7 Steps to Take When Buying a Business

Posted by Business Valuation Specialists LLC on Dec 16, 2015 2:30:00 PM

buying-a-business

When you're buying a business, it can seem like there are so many things you need to take care of! Financing, business licenses, legal changes, learning how the business has been run in the past - it all adds up to a confusing process. Here's our breakdown on the steps you need to take to successfully buy a business that will be a great investment.

7 Steps to Buying a Business

  1. What kind of business are you considering buying? You'll want to probably stick to something you have some experience in, as it will be much easier to maintain while learning the ropes. This should also include the business' size. If you've worked in a three-man plumbing operation for the past ten years, you're probably not ready to take on a 100-plumber, multi-location enterprise unless you're ready to spend some serious time on the learning curve.
  2. What's your budget? For that matter, what shape is your credit in and what can you offer, if needed, for collateral? These aspects are very important when you're buying a business, because they determine exactly how much you can spend on your total investment. Make sure you include a cushion for unexpected expenses, and remember to be detailed in  your assessment, including funds for a broker, closing or business valuations.
  3. What area do you want to buy in? If you're looking for a very specific type of business, you may need to be flexible in what geographic location you want to live. Otherwise, this can be as vague as a general area of the country or as specific as a particular neighborhood of the city. Make sure you take a good look at cost of living, local wages and taxes so you know what you're getting into.
  4. Start investigating businesses that fit your requirements, whether through a classified ad or a business broker in the area. Don't forget to investigate existing businesses that aren't currently for sale, as the owner may be willing to consider a good offer or may know other business owners in the area who are willing to sell but haven't listed their business yet.
  5. Have a business appraisal performed on the company you're considering purchasing. A company valuation goes beyond just looking at the land and equipment value, it also considers the company's reputation and goodwill in the community, prospective income and similar areas of concern. The valuation of a company also gives you a solid point to negotiate from during the process.
  6. Consider financing. You can look at debt financing, which involves getting a business loan. The Small Business Administration may be able to help in this case as they'll often guarantee a percentage of your loan for the lender, making it much easier to get the funds you need.
  7. Transition. The transition period is when you're learning the ropes and can last anywhere from several weeks to six months or more, depending on the complexity of the business. Plan on leaving as much time free as possible from other obligations during this time period so you can focus on keeping the business rolling as you learn.

By following these steps, you can ensure that the business you're purchasing will be a good investment. A solid business valuation is one of the most important steps in determining a business' financial well being, but it's also one of the most commonly overlooked steps in the process. To get a quality business valuation, please contact us today. We're always happy to put our highly-qualified business appraisers to work for you.

Tags: business value, buying a business

Changes Ahead: How Business Evaluation Services Help You Prepare

Posted by Business Valuation Specialists LLC on Nov 12, 2015 2:00:00 PM

business-evaluation

When you're running a business, having a business appraisal performed may not seem like something you need to worry about at the time. But what about when you're looking at a change of ownership, a merger or an acquisition? Business evaluation services can help you determine the exact valuation of a company to ensure that you make smart decisions during times of transition. Here's how business evaluation services help in each of these situations:

Changes in Ownership

Whether you're selling your business or transferring ownership to the next generation, business appraisals do a great job to help you know exactly what the company valuation is so you can come to the negotiating table prepared. Company owners who have quality business valuations performed prior to making changes in ownership tend to get more in their negotiations because they have the documented evidence of the company's full value.

Mergers and Acquisitions

Another place where having a quality company valuation comes in handy is during times when a company is either going through a merger or acquiring another company to expand. Because both sides in the deal are trying to get the best possible price, having a quality business valuation performed helps give you better price support during negotiations. In this particular situation, you may want to have a few different business appraisal methods so you know the range of values that can be used with a company. These can include:

  • Asset-based values look at the value of the company's assets. If your industry is currently in a buyer's market, you may have a hard time negotiating a higher price, especially if your company has not built a brand that conveys goodwill value with the merger or acquisition.
  • Income-based values take into consideration the future income of the company, often discounted to reflect that the current owner will no longer be waiting to receive that income but will instead receive it at the time of the merger or acquisition.
  • Market-based values are great if your industry is currently in a seller's market, because it bases the valuation of a company on current market conditions and recent sales.

Investment Opportunities

What about when you have the option to purchase additional equipment, facilities or other assets? If you don't know what your financial picture truly looks like, you won't know whether making the buy is a good idea or if it will leave your business in a risky situation. Don't depend on your tax accounting records, because machinery is often completely depreciated before it has reached the end of its usable life cycle. It's especially important to work with business evaluation services to have a proper company appraisal performed when you're considering financing options, because you may not otherwise be able to prove your company's true net worth unless you take into consideration the actual value of all your assets, not just the ones that have not been depreciated fully.

By keeping this knowledge in mind when your business is making a change, you'll be able to steer a successful course through the pitfalls and issues that plague business owners at that time. But what if you still have questions? As a professional, qualified firm, Business Valuation Specialists has seen countless companies through the issues you're facing now or in the future and can help you get through theses difficult times. Please contact us for more details or to schedule business valuation services for your company.

Tags: business value, business evaluation

Things to Think About Before you Buy a Business

Posted by Business Valuation Specialists LLC on Sep 28, 2015 12:00:00 PM

You're 51 and your employer of 15 years tells you that the company is going in another direction and your services are no longer needed. Suddenly, that six-figure salary you were receiving is gone. What are you going to do? Finding another well-paying job will not be easy and the thought of an extended job search is unappealing. Maybe you should make your own job and buy a business?

You're 28, full of energy, and ready to conquer the world. At work, you feel like a small fish in a big sea.  One day you realize that this is not the life you want so you give your notice. Buying a business makes you the big fish and gives you the opportunity to control your own destiny. 

Don't Make any Hasty Decisions

No matter what reason you have for wanting to buy a business, you should take your time before making an offer for an existing business. Ask yourself some questions.

  • Are you sure you want to be in business?
  • How much time are you willing/able to devote to running it?
  • Is the risk worth taking if it means giving up a high-paying job?
  • How will it affect your family?

The worst thing you can do is to get caught-up in the emotion and excitement of the moment and make a bad deal. To be sure you are not paying too high of a price, you should know the valuation of a company you are interested in purchasing. A business appraisal provides you with a good estimate of the company's fair market value. It serves as a reference point for making an initial offer. It makes it easier to negotiate a final sale price. 

How are Business Appraisals Done?

  1. A business appraisal starts with a conversation or communication with a business valuation specialist. It provides an opportunity for you to give some basic information about your company to the appraiser. The appraiser, in turn, will talk to you about the unique characteristics and trends in your company's industry. After the initial conversation, you should feel comfortable that the person you are talking to has the expertise and experience to qualify as a business valuation specialist.
  2. The next step is to get a quote for your company valuation. The amount you are quoted is based on the things you discussed during your initial consultation. Among the things that can affect the amount of the quote are the size of your company, the detail of the appraisal, and the length of time it will take to complete the appraisal project.
  3. Once you get the quote, you are under no obligation to have the appraisal done. You are not penalized for changing your mind. If you accept the quote and want to proceed, you will need to sign an engagement agreement and make full payment for the business appraisal.
  4. The appraisal itself requires you to provide additional data. You will be asked to complete a business questionnaire and to submit several years of tax returns and/or financial statements.  Most owners who are anxious to sell their businesses will provide the necessary documentation about their company so a company valuation can be done. If you express serious interest in buying a company, and the owner won't provide tax returns and other financial documentation, be suspicious. It may be an indication that the owner is asking more for the business than it is really worth. 
  5. Assuming that you are given access to the financial records of the company you are interested in buying, the data and information you provide is analyzed and a valuation report is generated. After receiving the valuation report, you can discuss the results with your business appraiser.

Tags: business value, buy a business

How to Value a Small Business that is Losing Money

Posted by Business Valuation Specialists LLC on Aug 26, 2015 8:00:00 AM

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Would you buy a small business that is losing money and makes no profit at the end of the year? Without a professional business appraisal, you could not come up with a solid reason to either answer in the affirmative or entirely rule out such a purchase. If you have not done a company valuation and don't know what the struggling company is worth, the most intelligent way to answer the posed question is with a resounding maybe. How to value a small business that is losing money requires you to find answers to a number of different questions.

Why is the Company Losing Money?  

Sometimes it is easy to identify the reason why a small business is losing money and sometimes the reason is not so obvious. The loss of sales or lack of profits might be due to temporary or unusual circumstances.

  • An act of nature disrupts business for an extended period of time
  • A cyber attack corrupts data necessary for the operation of the business
  • A 6-month road construction project diverts customers from your store    

As long as a small business has sufficient access to capital to make it through such temporary setbacks, they can usually recover. It would be wrong to reject buying a small business because it lost money due to correctable issues that were beyond its control.

Small businesses lose money all of the time due to poor planning, poor decision-making and bad management. Appraisals done under such circumstances are likely to produce lower business valuations than what might be if the negative issues were addressed and corrected. 

  • Poor planning can lead to inventory issues (too much or too little) that can hurt the bottom line 
  • Poor decision making (pricing, products, contracts etc.) may cause a business to struggle
  • Bad management that does not utilize its assets wisely leads to lost opportunities

A new owner who can address these issues and unlock the company's true value, may create a substantially higher business valuation and earn a significant return on his or her investment.

What are the Company's Assets and Liabilities?

The valuation of a company always requires a close examination of the companies assets and liabilities. Before you buy a small business, you want to know what it owns and what it owes. Business appraisals do more than just list a company's assets and liabilities. They delve deeper and assess a company's worth by verifying the stated amounts on the balance sheet and books of the company.  Looking at a construction company? Don't rely on book values of the machinery and invest in a construction equipment appraisal to understand the actual value. 

Can the Company Start Making Money?

A business appraisal can help you assess whether or not the company you are considering can be turned around into a money-making proposition. In some cases, struggling small businesses are destined to fail because they no longer sell a product or provide a service the public wants. You would be hard pressed to create a scenario where a company that sold and installed pay phones could survive in this age when everyone carries a smartphone.

Temporary circumstances that cause a business to struggle can be overcome. A better marketing plan, new product line, or increased productivity, are just a few of the ways a struggling business can start making money again. 

How Hard Will it be to Turn the Struggling Business Around? 

How to value a small business may depend on how much time and money it will take to turn losses into profits. Obviously, the more time and money it would take you to "fix" the business, the lower the price you would be willing to pay for that business.

Buying a Struggling Business

Struggling small businesses often sell at a large discount to their potential value. Owners get tired and frustrated with what may seem to them as a never-ending struggle. They just want to get out and that creates a big opportunity for individuals looking to buy a small business. If you know how to value a small business, you can choose one that can provide superior returns and appreciate in value.

Tags: business value, how to value a small business

How do you determine the value of a business using ratios?

Posted by Business Valuation Specialists LLC on Aug 5, 2015 11:00:00 AM

how_do_you_determine_the_value_of_a_business

Is it a good investment or a bad investment? Are you getting the most that you can when you sell your business? Business valuations can help facilitate the sale of a business and can also be useful in a number of other situations. So, how do you determine the value of a business? Business valuation specialists rely on several different ratios as at least part of their analysis when they are asked to establish the worth of a company. Valuation ratios provide investors with insight into whether a company is priced too high, is reasonably priced, or is being offered at an attractive, below-market value price. While financial ratios are not the end-all to an accurate valuation of a company, they are a strong tool.

Ratios are relationships between two or more variables. They are useful in a business appraisal because they use actual numbers to measure such metrics as sales, earnings, and cash flow. Ratios also have their limitations. They can not measure valuable intangible assets like goodwill or a large and loyal customer base. In order to get the most accurate company valuation, business appraisals typically include more than one type of ratio. Listed below are five of the most common financial ratios used to determine the value of a business. 

Price-to-Book Value

To arrive at the price-to-book value ratio, you divide the stock price per share by the book value per share. Book value is a conservative measure of the company's value based on net assets (assets-liabilities). When considering a purchase, the investor can get a sense of value by noting the multiple (selling at 10-times book value) or discount (selling at less than book value) of the sale price. Book value records assets at their historical cost and may not reflect the current value. It does not account for such variables as goodwill and growth, which can add value to a business. A company valuation that relies only on the price-to book value ratio can dramatically underestimate the true value of a company. 

Price-to-Earnings

This ratio compares the price-per-share to the earnings per share. It is commonly known as a P/E ratio and can be an indication of whether a company's stock is cheap, priced correctly, or priced optimistically. When a company's P/E ratio is high, it can mean that it is overpriced, or it can mean that it is selling at a high multiple based on strong expected growth. By the same token, a low P/E ratio can mean a company is undervalued or has limited growth potential. As a precaution, investors should be aware that earnings can be manipulated by management and future earnings may be based on subjective assumptions. Either, or both of these factors can lead to a less accurate P/E ratio and the wrong valuation of a company. 

Price-to-Cash Flow

This ratio compares the price of a company's stock to the cash flow generated by the company. Many consider it to be a more reliable method of determining value than a P/E ratio. Unlike earnings which can be manipulated by non-cash items such as depreciation and tax planning, the price-to-cash flow ratio gives a more accurate picture of a company's financial health.   

Price/Earnings-to-Growth

Called the PEG ratio, this ratio is more robust than a P/E ratio because it factors growth into the equation. Investors value growth and that can add to the value of a company. A PEG ratio of 1.0 indicates a company is fairly priced. A PEG ratio above 1.0 may indicate that a company is overpriced. A PEG ratio below 1.0 may indicate a company is a bargain. 

Price-to-Sales

This ratio will tell you the price of a company's stock as compared to annual sales. Like cash flow, sales data is not easily manipulated. The higher the price-to-sales ratio is, the more investors value the company. 

Valuation ratios are not perfect. How do you determine the value of a business that benefits from the goodwill it established by being a socially and environmentally conscious company? How do you determine the value of a business that is highly dependent on one or two key people?

Each business is different. For small companies, ratios may not be an effective method to understand and value the operations becuase of size differences between public companies where this information is much more available.  If you want an accurate business valuation, get a business appraisal from a professional and experienced business valuation specialist.

 

Tags: business value, value of a business