Business Valuation Blog | Understanding Buying / Selling a Company

Consultants are oftentimes viewed as a necessary evil to accomplishing the larger goal of ensuring one has all the information needed to make the wisest decisions in a business or personal transaction. Without them, you may be led down the wrong path by a biased source or someone without the knowledge and experience to provide you with the leverage needed to make informed choices.

Typically, consultants are engaged in transactions where both independence and expertise are critical to a successful outcome, whether that be in a financial endeavor, business combination, professional dispute, arbitration, or litigation proceeding. Accountants, appraisers, insurance advisors, statisticians, and legal experts, to name a few, are engaged by one or both parties in a situation where there is a significant need to comply with regulations, and settle cases where disagreement on key issues is apparent.

The answer to the question in this article's title lies predominantly with the individuals you choose to work with.

Ask yourself the following when considering engaging with consultants:

• Does the consultant fully understand the larger picture in play, and can they keep this perspective while focusing on their specific role?
• Can they remain fully independent in the case at hand, regardless of who hires them?
• Does their experience and expertise fit with the specifics of the transaction or dispute?
• Are they accredited and/or certified as a professional in their practice?

The most effective consultants understand their role in each unique situation and can work seamlessly with the parties involved, without trying to influence areas in which they are not requested to participate.

Credentials on paper can speak to much of this, however, a more personal vetting process should complement the review process, to ensure you are bringing the right consultants to the table. Don’t necessarily prioritize cost over quality, as it may come back to haunt you down the road.

In the end, a strong team assembled to accomplish the specific goals of any transaction or business dispute settlement will likely avoid a lot of unplanned costs and damages in the long run, and lead to an equitable outcome.

There will always be differing opinions as to why the US, and the world in general, are facing significant challenges from inflation, supply chain delays, post-COVID hangovers, and many other economic factors that may have a negative impact on your family. If you own a small business, these issues can also impact your revenue and cost structure while creating new concerns you have never faced before.

In some cases, I have seen opportunities arise from these challenges, going back to the start of the pandemic. Savvy business owners have taken advantage of new markets during these difficult times, while others simply had no alternative options other than attempting to outlast the downturn. These latest economic issues appear to be seeping into every industry and business, from technology to energy to food markets, with no short-term solution in sight.

Regardless of the type of business you own and the effects the economy has taken on it, it might be a good time to consider reevaluating your company, given the recent changes that have occurred as a result. Taking a hard look at the state of your business can provide you with the ability to adjust course in certain key areas where revenues and expenses are concerned.

As we have all seen from past experience, there is always a light at the end of the tunnel, regardless of how long and dark it may be. Planning ahead with a strategically revised business plan, starting with a current assessment, can proactively put you in front of the competition.

Your future success and that of your business can, in part, hinge on creating new ideas that will open up opportunities created by these downturns. While many will continue to gripe and complain about the state of the world and how it negatively affects their livelihood, you can look to be one of those who seize the moment through insight and careful planning.

One of the biggest challenges small business owners face is keeping track of all their records for sales, costs, and everything in between. Being organized is critical when it comes time to value your company for a sale, new investor, or any other reason. It will require a lot of information be given to a certified appraiser, who needs to understand the details behind the numbers.

Tax returns, income statements, and balance sheets are the most common types of documents recorded annually, however, these figures may not tell the whole story as the value of your business is determined. Certain expenses will be fixed, while others may be variable and discretionary, which should be discussed with the appraiser so they can make adjustments to the bottom line that otherwise might be missed.

Is it important for you to understand the value of certain tangible and intangible assets as part of the appraisal? The business appraiser will rely on your depreciated tangible asset levels unless you can provide recent equipment or real estate fair market reports, which may show considerably higher figures. Some appraisal firms have the capability of valuing these tangible assets concurrently with the business appraisal as part of the overall project.

The intangible value will normally be picked up within the general goodwill category. If you believe there is significant worth to specific assets such as; customer relationships, contracts, trademarks, patents, websites, or similar intangibles, you will need to provide details that can be supported by revenue streams and related data.

It is important to not only provide the appraiser with as much realistic backup data as you can but to also stay involved and be available to answer questions that may arise during the valuation analysis. These tactics will lead to an optimal outcome while supporting reasonable conclusions for the overall value of your business.

You are 55 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 create your own job and buy a business?

You are 30, in your prime, and ready to conquer the world. At work, you still 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 in anticipation of something better. Buying a business will make you the big fish and gives you the opportunity to control your own destiny.

No matter what reason you may have for wanting to buy a business, you should take your time before making this decision and ultimately offering up a lot of money to purchase an existing business. First, ask yourself these questions:

• Are you sure you want to own your own business?
• How much time are you willing and 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?

It is easy to get caught-up in the emotion and excitement of the moment and make hasty decisions. To be sure you are not paying too high of a price, and are getting into the right market, you should understand the real value of the company you are interested in purchasing.

A business appraisal provides you with a supportable estimate of the company's fair market value. It serves as a reference point for making an initial offer and makes it easier to negotiate a final sale price.

How are Business Appraisals Completed?

1. A business valuation starts with a conversation or communication with a business appraisal company. It provides an opportunity for you to give some basic information about your intended company to the appraiser who, in turn, will talk to you about the valuation process. You should feel comfortable that the company you are talking to has the expertise and experience to qualify as a certified business appraiser.
2. The next step is to get a quote for your company's 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 which then commits you to the valuation effort to be put forth by the appraiser. In many cases, the current business owner will be willing to cover a share of the costs to complete the work.
4. You will then be asked to complete a business questionnaire and submit prior tax returns and/or financial statements. Most owners who are anxious to sell their business 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 will not provide tax returns and other financial documentation, be suspicious. It may be an indication that the owner is asking more for the company is really worth.
5. Assuming that you are given access to the financial records of the company you are looking to acquire; the data and information is analyzed by the appraiser and a valuation report is generated. After receiving the report, you can discuss the results with your business appraiser.
6. You are now ready to make effective decisions and negotiate a reasonable sale of the company you may be running in the very near future.