Business Valuation Blog | Understanding Buying / Selling a Company

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 you're running a business, it can seem really difficult to determine how to build growth into your company. One of the easiest ways to do this is by valuing an industrial company to determine where it's strong and weak, what insights you can pick up and similar aspects. A often ignored option, business valuations help you figure out where to improve, where to invest and which areas you're doing great in. Here's more information on the benefits of business appraisals when you need to get your company operating efficiently again.

Valuing an Industrial Company to Create Growth

May people are under the misconception that business appraisals are only for when you're buying or selling a business. They're often surprised at the depth of information provided in a business valuation report. Do you have multiple locations in similar areas that behave completely differently? Are you trying to figure out how to improve production or profitability? Are you wondering what your business is really worth, whether you're considering selling or not? These are all excellent reasons to have a business appraisal performed.

Many business owners rely too much on their tax accounting records. But tax accounting reflects standardized tables, figures and values. The only way to know whether your business is average or not is by having a business appraisal performed.

A business appraiser who has experience in the industry may be able to offer insights into not only why the business is underperforming, but may be able to tell you how to improve operations. They can make suggestions about how to draw a different crowd to that location to make up the difference.

Some business owners make the mistake of basing their business value on what similar businesses have sold for. While this is in fact one way to value a company, business owners often don't understand how the multiples work and apply them to the wrong numbers leading to an inaccurate assessment. They can be very far off using rules of thumbs or multiples heard at the country club. Differences in income or overhead can also make a big difference. 

Speaking of income and overhead, a good business valuation specialist can tell you where your company excels, where it measures up and where it needs improvement. Maybe instead of taking a risk with that expansion, you really need to upgrade to more efficient equipment. It could be that your company provides phenomenal features in your products, but the market perception is that they don't last long. Any of these reasons can affect your bottom line.

By keeping these benefits in mind, you'll be able to very quickly use the valuation of a company to determine a smart course of action. If you need help valuing an industrial company, a certified business valuation specialist is the best way to go, as they use standardized methodologies in their reports.

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.