When business value needs to be determined, it can seem like a very mysterious process. The appraiser looks at your numbers, considers some areas you may not have expected, looks around at the industry and then provides you with a figure. But what's really involved in a typical business valuation process and where does that information come from?
What's Involved in a Typical Business Valuation Process?
When a company calls a business valuation firm, they often don't know what to expect. But from the moment of that initial contact, the business appraiser is already gathering the information needed to begin the process. Questions such as why is the appraisal needed, how is the business organized and what are the plans for the future of the business actually play an important role as the appraiser determines what information will come into play during the appraisal process.
Why? When a company is being eventually sold or merged with another is a completely different situation than when a business needs to be sold quickly to buy out a partner in a divorce or satisfy estate requirements. In one situation, the business can wait for the right buyer, while in the other, some level of liquidation and compromise will need to take place to meet the timeline set by the courts. But in either case, what will happen next?
The appraiser will then request some information. Typically, this will start with financial records. This helps the appraiser see where the business stands currently. They'll take a look at historic financial statements and adjust them as necessary to gain the best possible picture of your company's financial history. This will help if an income-based approach is used to valuing the business.
But what about your business' reputation for excellence in the community or industry? This will come into play as well. If your restaurant represents the only real place to go for exceptional Italian cuisine and is a hit in the area, it will have a much higher value than an average cafe that doesn't stand out from the crowd at all.
Your assets will also come into play. Do you have an exceptional location for your store or service? This will be reflected in the appraised value as it is calculated by the valuation specialist. If your equipment has been very well maintained and is expected to provide many more years of reliable service, it's worth much more than neglected machinery that will need to be replaced before production can really begin again.
What condition is your industry or market in? Selling a residential construction company right after the housing bubble burst in 2008 wouldn't have gained you much, but selling an oil drilling company when the Williston oil fields were just being tapped would have provided a significant profit. When your market is going well, you're much more likely to find a buyer willing to invest.
Though the business valuation process can seem complicated, it really just looks at the information that is available and then determines a fair value for that company. A certified business valuation specialist can make this process seem easy because they've spent significant time during the certification process learning which approach is needed in which situation. By taking advantage of this knowledge, you can quickly gain important insights into your business' operations, place in the market and potential for improvement.