Business Valuation Blog | Understanding Buying / Selling a Company

Why is a company appraisal helpful when buying a business?

Posted by Business Valuation Specialists LLC on Sep 27, 2017 1:32:00 PM

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Buying a business is a big investment. Though it may be the culmination of a lifelong dream, there's always a chance that dream could turn into a nightmare. From poor profitability to hidden problems with assets, knowing what you're getting into before you buy is always a good deal. Here's a quick look at how a company appraisal can be a big help during the process.

Why is a company appraisal helpful when buying a business?

As you look at a company you're thinking about buying, what kind of information do you need? Finances, reputation, market share: all these areas tie together into a picture of the company's overall value. But how is that value determined? Most of the time, the business is worth significantly more than just the sum of its assets once liabilities are handled.

A company appraisal provides you with a great deal of information to help you decide whether it's a good investment or not. The appraiser starts by taking a solid look at the company's financial records. They can determine what the expected future income of the company will probably be, based on its financial history. 

But what if your company is in an industry that has really taken off recently and the owner wants to take advantage of that potential in the sale price? A business valuation takes a deep look at where the market currently stands and where it's projected to go in the future. That helps you to decide whether the investment is a good risk or not.

What about the company's reputation in the market or community? If the brand is well known for high quality products or services, you can benefit from that reputation and community goodwill when you buy the company. This may allow you to see better returns with less overall work in a shorter period of time.

Is the company known for its unique approach to innovation and development of state of the art products? This is another area where a business appraisal specialist can look at what the company has done in the past, what their market share is and what you may be able to expect from that advantage well into the future.

Are there areas for improvement? Many businesses operate at less than peak efficiency for the majority of the time. If there is room for improvement, you can quickly turn a mediocre level of profitability into a truly outstanding one. The appraisal report will include some information on where improvements could be made.

How well does it hold up when compared to its competitors? Part of the business appraisal process involves looking at the industry or regional market, depending on the type of business you're getting into. When it comes to business value, there are a wide range of factors that can make the business you're considering buying better or worse than others, depending on location, well-known employees or other factors.

When you take the time to investigate the company you're purchasing carefully, you'll quickly find that the benefits well outweigh the costs. A company appraisal performed by a certified valuation specialist helps ensure you're making a wise investment instead of throwing good money after bad. By finding an appraiser with experience in your industry, you're sure to make a great start when buying a business.

Tags: buying a business, company appraisal

How Do You Determine the Value of a Business?

Posted by Business Valuation Specialists LLC on Feb 22, 2017 12:46:00 PM

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It doesn't matter whether it's time to sell, pass the hat to the next generation or just get a better picture of where your business is heading, determining the valuation of a company can be a very complex, confusing process for many business owners. How do you determine the value of a business? The world of business valuations involves several different approaches to help answer that question. Here are the basics to help get you going.

How do You Determine the Value of a Business?

There are several key approaches that are used and methodologies within each one, depending on what your situation is:

  • Asset-Based: Though this is often the one most business owners turn to, it's also the least accurate of a healthy business. An asset-based approach uses the value of the business' assets alone. The problem with this type of approach is that it doesn't account for the business' goodwill or its future earnings. For that reason, it's typically only used in liquidation situations, such as bankruptcy. It can include a number of different approaches, but if you ever deal with an appraisal company that is basing the valuation of assets in the company books, you'll want to proceed with caution when selling, especially if you have fully-depreciated equipment or assets that are still in operation in the business. Using a book value approach means that those pieces of equipment are essentially being given away in the process rather than holding their actual value to the business.
  • Income-Based: When you sell your business, you're not only selling the assets, you're selling future income. For that reason, income-based business valuation is one of the most popular types of business valuation used in small and medium privately-held businesses that have enjoyed steady market conditions for a period of time. Generally speaking, when a company has had a steady cash flow over the years, it will be appraised using capitalization of earnings approach to reflect that regularity. In contrast, a company that has had irregular income will often be valued using a discounted earnings approach.
  • Market-Based: You may want to consider a market-based approach to business valuation. Why? Because when an industry is in a period of rapid growth, past income may not reflect future potential accurately enough. During these times, a market-based approach looks at businesses that have sold recently that have particular similarities to the business being valued. This method can use multiples of discretionary earnings or gross revenue, the sale price of a similar transactions. In the last two methods, the sale price is adjusted for any differences between the companies to come up with the best fair market value for the company being appraised.

So how do you determine the value of a business? By this point, you know that business appraisals are just as flexible as the circumstances that demand them. If you need help determining the valuation of a company, we can help.

Tags: how do you determine the value of a business, company appraisal

10 Reasons for a Business Valuation

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

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When you're in business, you know that a business valuation can be a great tool for improving your company. But under what circumstances should you get an updated business valuation? Here are ten of the most common reasons to get a business appraisal.

10 reasons for getting a business valuation

  1. Transitioning business to family members: Passing your business to the next generation is a great way to maintain a legacy, but you still need to get a fair price for your equity. A business valuation assures that you have documentation of the company's value.
  2. Selling a business to a third party: When you're selling your business to an outside party, you want to ensure you get what it's worth. Having a quality business appraisal helps ensure you're not leaving money on the negotiating table.
  3. Buying out an exiting shareholder: When one shareholder wants to leave a business, you want to control those shares in some situations. By knowing what those shares are worth, you know what a fair offer would be instead of worrying about overpaying or stripping the business of vital capital.
  4. Adding additional shareholders: Have you ever had someone ask about buying into your company but you don't know what the shares are really worth? A business appraisal helps you know your business' true value.
  5. Estate planning and taxes: If there are only two constants in our world, it's death and taxes. In the case of estate planning, knowing what your business is worth allows you to plan for the inevitable taxes that are to come, so that you can ensure your legacy lives on.
  6. Key person insurance: What would happen if your partner or other vital part of your business passed away or was disabled and unable to work?  A business valuation helps prove what their contributions to your business actually are.
  7. SBA loan guarantee: When you need to get an SBA loan, you'll need to document what your business is actually worth.
  8. Strategic planning: A depreciation schedule may not show the true value of your assets, and if your balance sheet hasn't been adjusted for a variety of possible changes, you may be taking a larger risk than you'd intended. An up to date business valuation helps you make better business decisions with good information.
  9. Buying a business: When you're considering buying a business, you want to make sure there are no unpleasant surprises waiting in the books or the market. Because a quality business valuation looks at potential income, market conditions and similar concerns, you can rest assured that you're making a good investment.
  10. Litigation: Nobody likes being sued, plain and simple. When you're going through litigation, whether it's a divorce, injury case or any other type of court case, you want to be sure you can prove the value of your business, so that any damages can be based on what your company is actually worth instead of inflated figures from a lawyer's estimate.

As you can see, there are many common reasons business owners have a business appraised. If you haven't had your company valuation performed recently, what's stopping you? Knowing the valuation of a company is a valuable tool.

Tags: business valuations, company appraisal

Is It Worth the Cost to Get a Business Appraisal?

Posted by Business Valuation Specialists LLC on Nov 19, 2015 10:30:00 AM

 

Though many companies don't have regular business valuations performed, a business appraisal is a great way to take a look at exactly where your company's financial situation is and how it can be improved. Valuation of a company provides vital details to help you decide whether a change or investment you're considering makes good sense and doesn't put your business in a risky financial situation. But is it worth the cost? Absolutely! Here's why:

Why it's worth having a business appraisal performed

Getting a professional company appraisal done on your business helps you know exactly what you have and don't have. By knowing what the bottom line is, you're putting yourself in a good situation if an opportunity comes along, if you need to negotiate a contract or otherwise make a major decision for your company. Here's why business appraisals make good sense:

  • Depreciation doesn't give you actual net worth. Your tax accountant may have depreciated your delivery van over five years, but if you're still using it ten years later, that's five years where that van's value doesn't show up on your business' net worth statements.
  • You're not sure that your tax assessment is accurate. How do you fight a bad assessment without knowing what your company is actually worth?
  • Your market is booming and your bottom line doesn't reflect it. If you'd been an oil equipment dealer a decade ago in Williston, North Dakota, your business may have not been much more than the local hardware store, but when oil was discovered, your business' market value may have skyrocketed.
  • You don't have a clear picture of your business' financial situation. Because you don't know all the conditions that can affect your business' value, you can't make wise business decisions and may put your business in a risky position based on poor financial information.

The situations where it's helpful to have a business appraisal

But when is the best time to have a business valuation performed? Here are some common situations:

  • Making an investment in a company. When you're considering putting funds into a company as an investment, you want to know that the information you have on the company is accurate to ensure your investment is safe.
  • Looking at expanding your business. If you need to finance a business expansion, you're more likely to get a favorable loan rate if you can prove the true net worth of your business and the collateral that backs those figures up.
  • Considering a merger or acquisition. It doesn't matter which side you're on in this situation, knowing what your company is worth going in gives you a stronger position at the bargaining table.
  • Selling or passing your company on to the next generation. Much like looking at mergers and acquisitions, knowing what your company is worth helps you get a fair price and documents the value for the new owner.

As you can see, having a business valuation performed on your company can help you determine its financial health. But what about the company that is performing the company appraisal? You'll want to find a company with a reputation for excellence and that uses Certified Valuation Analysts (CVA) through the National Association of Certified Valuators and Analysts (NACVA) to ensure they're using the best recognized methodology for the business appraisals being performed. Contact us today with any questions or to set up a business appraisal for your company.

Tags: business appraisal, company valuation, company appraisal