Business Valuation Blog | Understanding Buying / Selling a Company

There are many reasons why a business owner should engage in an independent third-party appraisal of their company. They may be looking to sell, refinance, restructure, buy out a partner, or bring in new investors. But what about the importance of simply understanding realistically what your company is worth today by hiring a certified, experienced, unbiased professional to provide you with a complete analysis that you can rely on?

This is what we like to refer to as internal business planning. This broad purpose can cover a lot of areas, but more importantly, it’s a catch-all term that represents the owner’s interest in staying on top of the big-picture perspective of business value today, while providing insights into the shorter-term plans for the future.

It’s always a benefit to understand the real value of any type of asset, whether that’s your home, personal property, equipment, or even your net worth as an individual. If you own a business, the same mindset should be in place. Once a year, take the time to look at your company’s most recent performance in comparison to historic results, and when you have the current financial statements formalized, reach out to an appraiser and have the company value updated.

Once you’ve established a relationship with a professional valuation expert, they can likely provide some form of a discount for continued loyalty and service so the cost component of the work will not outweigh the benefit. As your business plans continue to develop throughout the year, the appraisal you’ve proactively sought out early on will come in handy as you complete your internal requirements. It will also be helpful to third parties who may get involved with your company’s operations.

Value is always going to be a critical component of any business transaction. Don’t get caught wondering or guessing what your business might be worth in the middle of a negotiation or when considering how much additional income you might have to increase employee wages or purchase new equipment.

The reasons to obtain an independently certified appraisal on a regular basis are many, and the more you plan ahead in anticipation of one of those events, the better prepared you will be to handle it effectively and efficiently. Reach out to a valuation professional today to learn more and get the process started.

Determining if you need to engage with an independent professional business appraiser will commonly arise when you are looking to purchase or sell a business. However, the fact is there are several other reasons an objective third-party appraisal is a great idea, and quite possibly a requirement to move forward with a transaction or to aid in a situation where a dispute may arise. Here are some examples:

Investor Buy-In or Buy-Out: You will look to have a fair assessment of company value determined to avoid a dispute and support a smooth transition.

Bank (Re)Financing: Virtually every bank or related lending institution will require an appraisal for loan purposes.

Litigation Support: Any legal disputes that bring your business into account will need an independent appraisal to facilitate a settlement or add support in a trial or arbitration.

Accounting and Tax Purposes: There are any number of reasons you will need appraisal work to aid in the review and approval of accounting and tax procedures.

Estate Settlement: When a family member passes and they own a business, a valuation will be an important component to transferring the property.

Development of a Family Trust and Legacy Transfer: When the next generation is ready to step in and take over the family business, an appraisal will be critical to the process.

Donation and Gift Tax: Some business owners may decide to donate their business or extend financial gifts through it. The IRS will require an independent valuation in support of the donated amount for tax deduction purposes.

Internal Business Planning: Looking ahead with long-term company goals from a growth and resource perspective will be much more effective with an appraisal assessment in support of project planning.

Divorce: If changes to your personal life include a divorce, your business, and personal property may become subject to the settlement.

If you find yourself involved with any of these situations, consider engaging with an independent, certified business appraiser to assist in facilitating the process.

As a business owner, there are many reasons why you may want to determine the actual value of your company. Here are some of the more common ones:

Business Sale

This is probably the primary reason a business valuation is needed. The sale of your company shouldn’t be finalized without an understanding of value. This will assist in negotiations and provide an independent analysis that both parties can agree on.

Ownership Transfer

You've put a lot of time and effort over the years operating your business, growing it into what you know is a strong successful continuing enterprise. One day you look up and realize it’s time to consider retirement or, at the least, take a step back and let the next generation take over the reins. To properly transfer ownership under this type of transaction requires a business appraisal to accurately reflect the value and determine a fair process to accomplish this final business goal.

Partnership Dissolution

Whether this involves a senior or minority shareholder stepping down or a personal divorce that needs to be settled, each party wants to realize a fair shake in the process. To avoid one side or the other trying to inflate or depress the actual value of the business, obtaining an independent appraisal will provide a solution.

Estate Settlement

When a business owner or senior partner passes away, it is an emotional situation. This can be further complicated when there are multiple investors and heirs to the business, some of whom may have different goals as to their settlement of shares. Some may want to liquidate the company, while others may want to continue forward and take over operational control. Engaging with a certified business appraiser to value the company and determine partial ownership interests can assist in settling all of these possibilities so the business and shareholders don’t suffer.

Merger/Acquisition

If your business is being rolled into a larger company as part of a merger or acquisition, the due diligence process will involve an appraisal of the business and its underlying assets. There are formal accounting principles and guidelines in place to complete this effort that an appraiser will follow to ensure the transition goes smoothly.

Going Public

If an IPO (Initial Public Offering) is in your future plans, after years of operating privately, you will need to determine value based on a targeted share price. There are a number of valuation techniques that can be used to compare your currently private company to a public one, allowing an appraiser to determine value and price those shares at a rate that is reasonable in the open market.

Liquidation

There may come a time when the business is not operationally profitable, and all forecasted redevelopment plans have been exhausted. In this case, a liquidation of the company will need consideration. Understanding and estimating the value of the company’s assets will be the primary driver in this circumstance, ideally with the purchaser giving some consideration for future operations.

Regardless of the reasons why a business valuation is needed, ensure you engage with a certified experienced appraiser that can work with you to facilitate a successful outcome.

When you're running a business, wondering what your company is worth is a common question. It's one that business appraisal can answer to a high degree of accuracy, but most business owners don't have a business valuation performed except in some specific circumstances. But what are some of the common reasons for business valuations? Here's a quick list of scenarios when this type of appraisal is performed and how it benefits the business in general.

What are some common reasons for business valuations?

1. Selling a business. How do you determine the selling price of your company? A business valuation helps to determine a fair market value based on your company's specific strengths, weaknesses, assets and liabilities. When you get a business valuation performed, you'll not only gain insights into these areas, you'll be able to improve them to ask top dollar for your business.
2. Dissolving a partnership or marriage. Invariably, the individual who is keeping the company wants their loyalty rewarded by paying very little for their partner's share, while the individual who is leaving wants the best profit from their share. Because this can be such a problematic issue, there are often requirements for business valuations performed for this reason to ensure fair market value is determined and both sides are dealt with fairly.
3. Death of the owner. When a company's owner passes away and the company is willed to the family, not all family members will want to stay in the business. There can be a lot of pressure brought to bear on the executor of the will to quickly sell and settle the estate, but having a business appraisal performed allows everyone to understand what the company is worth and whether they want to take a large cut in price for a short sale or wait for the best possible price from the right buyer down the road.
4. Retirement and passing on a legacy. You've worked hard for years to build up a legacy to pass on to the next generation, and now that you've reached your golden years, you want to make the process as quick and painless as possible. Business valuations can help you determine the value of the gift you're passing on, any taxes you or your heirs will need to pay on the transfer and similar aspects, helping you plan for those costs ahead of time.
5. Seeking financial backing. When you work with a bank or other financial institution, they often require a business appraisal be performed to ensure that you're not borrowing more than your company may be worth. There are any number of areas where your accounting reports may be off, whether due to older equipment that has been fully depreciated and is still going strong or real estate assets that have lost significant value over the years. By getting a report from a certified appraiser, they know that the figures were determined using standardized methodologies that will hold up well to scrutiny.

You don't need to use any of these reasons for business valuations, however, because having an appraisal performed helps you keep in touch with where your business is going. When a certified business appraiser develops a report for your company, you'll often find there are many insights and aspects you weren't aware of that can help boost your company's overall financial health. Take advantage of this information and see where it can take your company.