Business Valuation Blog | Understanding Buying / Selling a Company

As accredited appraisers, we are frequently asked how experienced we are in a particular industry when potential new clients inquire about our expertise. Most appraisers are considered “generalists” and cannot afford to focus a significant amount of time on any one industry if they want to maintain steady revenue and grow their business. There are numerous industries in which companies operate, and it is important for appraisers to apply their skills within all of them to create a diverse valuation practice.

Appraisers go where the opportunities take them, regardless of the industry in which their clients operate. If a valuation expert has been working professionally for a long time, they have likely completed a certain number of appraisals in many different industries, which increases the odds they have experience in the ones they are being asked about.

It’s important for clients to understand the distinction between industry and valuation expertise. They are two very different service provider segments that will intersect at times, but will demand professionals focus their expertise on one or the other. As an appraiser, it is not difficult to become generally well-versed in the industries in which they work when conducting appraisals. Combining the market research developed for each project with direct client communications enables them to understand what they need from an industry perspective to complete an effective valuation.

The standards and methodologies learned and employed by certified and accredited appraisers apply to every industry they work in. All the educational time and effort, as well as the application of these accepted approaches, are consistent for any company being valued. The more experience a valuation expert has, the more it will reinforce the understanding that employing these methods will provide greater support and credibility to their analysis and reporting process.

It is important to understand the nuances of the industry in which you are valuing. There are databases and market sources that provide this kind of information at the appraiser's disposal, if they know where to look. This data will influence the valuation conclusions and is typically based on a considerable number of comparable companies within the same industry.

Regardless of an appraiser's level of experience in any industry, they can provide a credible, supportable valuation of your business if they hold the proper credentials that make them experts in the appraisal industry.

If you have a partner who is looking to leave or is considering bringing in another investor into your small business, you will want to negotiate a fair buyout or buy-in with those involved to avoid a dispute. As certified appraisers, we see many instances in which the process has dragged on for months with no agreement, due in large part to the fact that the parties on each side of the transaction cannot reasonably agree on price.

There’s a lot at stake when valuing ownership shares amid the exit or new entry of investors, and it is common for different perspectives on value to become a sticking point. Before you enter into your first serious conversation about value, you should engage with a professional appraiser who can provide an independent, unbiased opinion of the value of the company as well as the percentage ownership share involved. They will work closely with you to gather the data needed to understand and analyze your business's financial details, while researching the specific industry and market in which you operate. You will have an ongoing open line of communication with the valuation expert to highlight any nuances and adjustments that need to be considered with your business while providing further insight that isn’t readily apparent from the income statements and balance sheets.

One of the frequent areas of dispute in these negotiations is whether to apply discounts to minority ownership interests and, if so, the level of those discounts. This approach may be appropriate if the ownership is considered non-controlling, which typically involves a share of less than 50%. These discounts reflect the lack of control a shareholder would have over the company's operational decision-making, as well as a reduced ability to sell their shares in the market to a third party due to the non-controlling interest.

It will be important to discuss all these topics during the appraisal analysis with your valuation professional, so everyone is on the same page regarding the underlying factors that will affect the value of your company and its associated shares.

To avoid wasting time in the negotiating process and reduce the chances of a serious dispute or even a legal battle, advise the parties involved that you will be engaging with a certified appraiser to conduct an independent valuation of the business and the percentage shares involved with the buy-in or buyout. Once the report is delivered, you can share the results and begin settlement discussions from a non-contentious point, greatly increasing the odds of an amicable transaction.

Remember to do this early in the process to firmly establish the ground rules and maintain a level of control over the process. As a business owner, the end result will impact you more than anyone else involved.

Business owners should be cost-conscious with many of their annual expenses; however, there are certain areas where price and convenience should not be the defining factors. When you want to best understand the value of your business, the only path you should consider is the old school standard. Premium quality and service mean better results you can depend on.

The cheap and easy route might save you money in the short term; however, it can come back to haunt you later. Quality can be measured in several ways, so determine what is most important to you when it comes to working with your valuation service provider before deciding on whom to engage with.

In today’s AI-driven world, it might seem fast and simple to just use an online tool to plug in a few numbers that spit out a value. But these gimmicks are unreliable, informal, and unsupportable.

Think about the following things when considering appraising your company:

Customer Service from Start to Finish

Who is communicating with you most effectively and consistently when you are inquiring about purchasing the product or service? Are they making you feel like the most important client from day one, even before you commit to collaborating with them? Do they follow through with that same level of communication and delivery after you have contracted with them? If the cheaper price leads to poor customer service and late deliveries, you have made the wrong choice.

Reliability of the Product or Service

Are you receiving the best, most dependable product that you expected and are required to have to satisfy your business’s transactional needs? What are the costs to your business if you receive inferior service? Might you suffer a hit to your own company’s reputation or end up on the losing end of a business dispute due to inferior quality?

Your Own Time and Effort Costs Money

Will engaging with the cheaper vendor be more time-consuming for you or your employees? Does the less expensive provider have enough experience and professionalism to save you time and effort? These types of qualities are critical to the process, and without them, you will end up with an inferior product that costs you too much time, which translates to lost revenue.

In summary, consider all the benefits that go along with choosing quality over cost. Don’t find out the hard way that the cheaper alternatives are not all they are cracked up to be.

When valuing small businesses, the appraiser must first understand the circumstances for which the report is being prepared. Unlike machinery and equipment appraisals, where the definition of value is the key variable driving the conclusion, business appraisals will lean more on the purpose and scope of work to determine the best way forward.

For example, if the reason is for an outright sale of the company, the appraiser will need to exclude cash, receivables, and liabilities from the balance sheet since the seller will take these current assets and obligations with them as part of the closing transaction.

If the purpose is a minority share buy-out or buy-in, the business appraiser will need to consider and apply lack-of-control and marketability discounts to the percentage shares being purchased or sold. These discounts will factor heavily into the share value unless the owner or potential buyer has a 50% or greater interest in the company.

Another example is in a divorce scenario, where the company being valued is part of a contested or negotiated asset division. There may be factors pertaining to the ongoing litigation or settlement that will need to be considered before finalizing the value.

How the appraiser calculates and weights the different approaches is also a driving factor that plays into methodology. A business can be valued in different ways, using a discounted cash flow and/or multiples of gross revenue, EBITDA, net income, and discretionary earnings. How these differing conclusions are ultimately weighed will influence the overall estimate of value.

There is always a degree of subjectivity in the ultimate reasoning behind any appraisal. Opinions will differ depending on the data relied upon, the methodologies used, and the appraiser's experience. They need to make sound, common-sense decisions based on supportable data to reach conclusions about value.

As a professional appraiser, all of these critical factors must be carefully considered throughout the valuation process. If you are an accredited valuation professional, always strive to fully understand the big-picture perspective of the underlying transaction your work product will apply to. The purpose and scope of work are important components of developing your appraisal framework. The more you know about your role within the confines of the larger deal, the better your decision-making will be.

As Artificial Intelligence (AI) advances, the impact on numerous industries is becoming more apparent, creating a shift from the heavy reliance on human expertise to automated technology models. The business valuation industry is no exception. Certified appraisers, long trusted for their judgment, experience, and nuanced analysis, are beginning to face competition from AI-powered tools that can process vast amounts of financial and market data in seconds.

Valuing a business in the traditional sense requires several hours of review and analysis with financial statements, comparing industry benchmarks, and applying subjective judgment to factors like risk, growth potential, and market conditions. AI systems can now automate much of this work by leveraging machine learning models trained on thousands of past valuations. These tools can generate highly consistent, data-driven estimates at a fraction of the time and cost.

One of the biggest advantages AI brings is scalability. What once required a team of appraisers can now be handled almost instantly by software, making business valuations more accessible to small business owners who can’t afford professional services. AI also reduces potential human bias, applying standardized methodologies across all cases rather than relying on individual interpretation.

This shift does not mean human expertise will no longer be needed. It should adapt and evolve, especially with more complex cases involving unique assets, legal disputes, and intangible factors. Human insight will always play a role in independent appraisal work; however, for routine valuations, especially in lending, mergers, and financial reporting, AI models may become the norm.

It will become even more important for valuation companies to explain that the importance of working with experienced independent appraisers is more dependable and supportable than relying heavily on AI models. Regardless, the continued advancement and integration of AI in business valuation will result in an undeniable shift. Certified appraisers are no longer the sole gatekeepers of valuation. They may instead need to become more relevant as reviewers, interpreters, and advisors, working alongside AI rather than competing with it. Eventually, those who adapt to this new reality will thrive, while those who do not may find their role increasingly diminished.

Settling a business owner’s estate involves many things that need to be resolved, and with the emotional component of this process, it can become overwhelming. If the individual wholly owned the company or was a partner, you will need to place a value on their estate assets to properly include them in the settlement. In these situations, it's important to engage an experienced independent appraiser who will provide an unbiased opinion of value to facilitate the process.

When reviewing the business and its underlying assets, it is also a good idea to look ahead at how you believe the future of the company may be affected by the prior owner or partner no longer being involved. Is there an opportunity to sell the company to the other partners or employees? Would you consider taking the company forward under new management? Would you need to dissolve the business altogether?

While you’re settling the estate, discuss these topics with the appraisal professional who can provide thoughts and opinions based on their review of the financial history and outlook of the company. It’s possible that the appraisal consultant can assist not only with valuing the business for the estate settlement but also with anticipating a future sale or a change in the company's structure.

Before you decide which consultants to engage during this trying time, inquire about their ability to work with you on multiple fronts so you can accomplish more than the immediate objective and address all the concerns you may be thinking about today.

It’s difficult to manage all the tasks involved with settling an estate, especially if the individual owns many assets. The more support you have to accomplish this, the better you can handle everything in a timely and effective manner.

If you are in the middle of an estate settlement, consider reaching out to professional consultants such as accredited appraisers, who will be there the moment you need assistance.

The appraisal industry is full of acronyms that only those well-versed in the industry can easily identify. Two of the more important abbreviations that factor significantly in the overall valuation of your small business are discussed below:

EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization

EBITDA is a measure of a company's profitability or cash flow; however, it may not fully reflect cash earnings. EBITDA considers a wide range of factors in business finances. It is considered a universally accepted appraisal measurement and is also used in accounting circles.

From an application perspective, it is used by banks and financial services companies to estimate debt servicing levels. It is also used to compare similar businesses within an industry or market and to preliminarily estimate a company’s current value using multiples of EBITDA derived from historical databases.

In a buy/sell scenario, adjusted EBITDA will also factor in discretionary and non-recurring expenses, which leads you to the following term:

SDE: Seller’s Discretionary Earnings

Seller's Discretionary Earnings (SDE) is a calculation that considers a business's net profit and adds back discretionary adjustments to show the full financial benefit to an owner or prospective buyer.

SDE is therefore a relevant income measurement calculated when a business is changing hands. Financial data associated with this calculation includes EBITDA, as well as non-recurring and discretionary expenses that won’t impact a company's future value from a new owner’s perspective.

If you're on the acquisition side, SDE provides a necessary benchmark to develop a reasonable estimate of your expected annual return on investment, as well as an understanding of realistic expectations for the business's continued growth. From the seller’s viewpoint, SDE supports an optimal level of value during sale negotiations. SDE allows both buyers and sellers to make informed decisions while preparing to invest in or exit a small business.

In summary, whether you’re conducting a formal independent valuation for a client or involved with the sale or purchase of a small business, EBITDA and SDE are two important data points that will be used measure both the current and future value of a small business.

If business appraisers had crystal balls, it is highly likely their opinions of value would match the actual price determination in a negotiated transaction or settlement. In this fantasy world, the advice and estimates that valuation professionals provide their clients would almost always occur exactly in accordance with their conclusions. In reality, the variables that can potentially impact the results of any final transaction, from a personal or business perspective, are many, and the best outcome the deal participants can hope for is that the independent opinion will be relied upon by both sides and positively impact the situation.

Appraisers are asked to estimate value based on a specific set of circumstances and assumptions, which will then dictate a number of variables to consider and rely on that are pertinent to the overall assets under consideration. The result is a well-thought-out estimate of value, based on the market and industry information they research, along with an analysis of the internal data they are provided with.

From an owner, investor, or seller’s perspective, the value conclusions can be reasonably relied upon; however, they are not a guarantee of any specific outcome. An appraisal is, therefore, not absolute; however, it should be used as a basis for negotiations between concerned parties, whatever their interests.

In an open market, many variables come into play when buying or selling any asset. The final sale price should be within a reasonable range of the appraised values; however, unforeseen factors that an appraiser cannot foresee may influence the transaction and be inconsistent with the prior assumptions.

Appraisals can also serve as a guideline to facilitate the settlement of disputes when there is no agreed-upon or pre-negotiated value for scenarios such as a divorce or a partner buyout. Differences of opinion are commonplace when it comes to valuing assets, whether that be with machinery & equipment, personal property, real estate, goodwill, or the overall worth of a business. Experienced appraisers who are accredited in their specific field can greatly assist in facilitating a successful outcome where these differing opinions exist.

The primary reason for hiring third-party appraisers is to remove emotion and bias from the equation when involved in a purchase, sale, buyout, or dispute. As long as the valuation professional is educated and experienced, these opinions will be well researched and supportable, enabling the parties and decision-makers involved to have an impartial perspective to assist in finalizing the terms of the transaction.

As the saying goes, nothing in life is certain except death and taxes; however, having reliable, dependable opinions can go a long way toward achieving a favorable outcome.

Valuation professionals often get asked about their experience in specific industries when bidding on new appraisal projects. This is a reasonable question to receive from potential clients looking to engage with the most qualified candidates; however, a strong response can be tricky to formulate, given that most accredited appraisers do not confine themselves to any given industry.

The majority of professional appraisers, whether they specialize in business valuation, machinery and equipment, personal property, or real estate, cannot afford to focus on a few specific industries, as this limits the number of opportunities for work and can stunt the future growth of their business. Firms that focus solely on valuation work can effectively value companies and assets across all existing industries.

Continuing education and developed experience derived from a career as a valuation professional focus on implementing consistent and effective approaches and methodologies, regardless of the industry. Appraisers will always consider and rely on the relevant market and industry data sources developed during every valuation process. Understanding how to research, review, and analyze this data, while independently concluding on value, is what separates the experienced accredited appraiser from the rest of the pack.

There is a distinct difference between experience and expertise. As an appraiser, you may have years of experience valuing businesses within many different industries, which is useful when potentially working in those same markets in the future; however, your expertise will always be in valuation and does not require an industry focus.

On the flip side, there are industry-specific experts across the spectrum who consult their clients on any number of business decisions that can affect a company’s future success. From market trends to investment opportunities, industry experts drill down deep to fully understand how best to work successfully within these specific sectors. They might understand the concept of valuation and have certain opinions; however, their focus is not on appraisals, and they probably aren’t the best option to independently appraise the companies and assets within their chosen industry.

In summary, it is important to advise potential clients of these distinctions and the fact that your expertise is in valuation and not limited to any particular industry. An effective response can help explain this and how you will consider important factors within their specific industry as part of the overall appraisal, while applying accepted, time-tested methodologies, resulting in an unbiased, supportable conclusion of value.

As a majority, equal, or minority shareholder in your business, there may come a time when you need to address a buyout request from another partner or investor who is opting out of their ownership interest. When this occurs, there are certain things to put your focus on that will greatly impact the negotiated agreement, including engaging with a certified valuation professional.

Does your company have an internally developed buy-in/buyout or another type of operating agreement that lays the groundwork for assessing value in these situations? Proactively addressing these eventualities is never a bad idea and is quite common among rapidly growing businesses that are frequently seeking new investors to manage capital funding requirements and add value.

Is the partner a key contributor to annual revenue whose departure would affect the ongoing success of the business? Is there a non-compete agreement in place to buffer the effects of this departure in the short term? If not, should the company be valued with the anticipated losses in sales, or is there a mutually agreeable arrangement to replace the partner and offset this reduction?

If the investor is buying out of a minority interest, should discounts be applied to reflect the lack of control and marketability? This topic is commonly debated in valuation assignments, where the shareholder may not have significant decision-making power, and there may also be an inherent difficulty in attracting a new investor given this lesser interest.

Given that these variables may create a divide between the parties on the ultimate price to be paid with partner buyouts, the likelihood of a dispute may be high, and could potentially drag out the process, in some cases leading to litigation between the parties. Engaging a certified professional business appraiser will provide an independent, unbiased assessment of value, which will assist in facilitating a fair settlement.

Whatever the situation with your company, when a partner or investor opts to buy out, it will justify the need to formally update the business's value and associated shares so you and any remaining owners can work through this process to a successful conclusion. As a bonus, the additional benefits of an independent appraisal of your business and its underlying assets can go well beyond these immediate concerns and support future growth plans as you forecast your business's future.