Business Valuation Blog | Understanding Buying / Selling a Company

When you're trying to determine the financial condition of your business, there is a wide range of formulas and techniques available. One key measurement is calculating earnings before interest, taxes, depreciation, and amortization (EBITDA). What exactly is EBITDA? Here's an inside look at how this figure is calculated and utilized in measuring the financial status of a business:

A Breakdown of EBITDA

The components of EBITDA consist of:

• Earnings: This refers to net profit, or the total revenue of your company less expenses and overhead.
• Before: The earnings before additional deductions are considered.
• Interest: Interest represents the cost of any loans and similar financial instruments your business has on the books.
• Taxes: This typically refers to income taxes only.
• Depreciation: Depreciation represents how much capitalized value you deduct for your fixed assets over a particular time period. It is typically determined using acceptable accounting standards such as the Modified Accelerated Cost Recovery System (MACRS) or through an updated valuation of your company’s tangible property (equipment and real estate).
• Amortization: Amortization is the reduction of business debt, such as loans and alternate types of financing over a given period.

As a general rule, EBITDA is a measurement to determine a company's profitability, or cash flow, however, it may not fully represent cash earnings. EBITDA considers a wide range of factors that come into play with business finances. It is not a universally accepted accounting measurement, and, therefore, has some flexibility with how it is calculated and measured.

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

A similar calculation that provides the same basic information is the earnings before income and taxes, or EBIT. The difference with this measurement is the exclusion of depreciation and amortization. When these variables are removed from the calculation, it represents the company's operating profit vs. overall cash flow.

With an understanding of how EBITDA is measured and utilized, you can gain a better understanding of how your company is viewed in the industry and its overall financial health. It is always optimal to have a more detailed independent measurement of value completed for your company, especially if you plan to sell, expand or refinance debt. A certified business appraisal will provide you with the overall value of your company, as well as information on the market, industry, competition, and the strengths and weaknesses of your company.

There are different ways to perform 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 the different approaches to valuing your business and which one is the most appropriate for your situation.

Pros and Cons of Market-Based Business Valuations

A market-based business appraisal makes sense for many industries. Consider the owner of a semiconductor manufacturer located in California who wants to sell the company and retire. If there are other businesses nearby, operating in the same or similar marketplace, a business appraiser can compare the subject business being sold with others like it, getting an idea of the market share and competitive advantage of the business.

A “Gross Revenue Multiple Method” may work in these cases. Under this method, the appraiser takes the transaction price and divides it by the revenue. They then find similar companies and determine a gross revenue multiple. This multiple is applied to the target company's revenue to roughly estimate a business value. This method is simple and quick, however, far less detailed than other appraisal methods, and often best for preliminary measurement purposes only.

Pros and Cons of Asset-Based Business Valuations

An asset approach estimates how much it would cost to build a similar business from scratch. In this type of valuation, the professional appraiser will estimate the total assets and liabilities of the business. Subtracting liabilities from assets, the appraiser will come up with a valuation.

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 “added-value” in an asset-based approach. If the engineering company was 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 (The “Discounted Cash Flow” Method)

If your company has a stable earnings flow, then the “EBITDA”, (earnings before interest, taxes, depreciation, and amortization) can portray an accurate business valuation. Since this provides a snapshot of the business valuation at one point in time, it might not be the best method if earnings are projected to spike or if the company is experiencing a slow quarter.

If the business is going through an inconsistent period, the discounted cash flow method may work well. Here, the appraiser estimates the future benefits of the company, then converts them to present value to come up with a fair market value.

Ultimately, a certified, experienced appraiser can determine which method makes sense for any given company at a given point in time, and reasonably estimate the company’s value, while explaining the process to key investors and owners. Given all that is at stake when considering selling your business, it's critical to hire a certified business appraiser who understands your industry.

When you need to have a business valuation performed, a reputable valuation firm can provide you with significant insights into your company that in turn, can offer a wide range of benefits to your business. But what exactly happens when you're working with a valuation firm? What can you expect from a certified business appraiser? Here's a quick look at what takes place when undergoing a business valuation

To start with, a quality business valuation company will look at much more than just the basics of your business and its financial health. They will complete a comprehensive review of the industry and what factors may affect your business's ability to perform in the marketplace. They'll take a solid look at the risks and rewards of certain growth plans and provide you with a detailed report of what your business is worth along with areas in which it is strong and in those which could be improved.

Here are the typical steps that are taken in the process:

1. The appraiser will gather basic information about your business. This will include the type of business, availability of key information, potential areas of importance to the business valuation. The purpose of the valuation is also determined, as particular types of appraisals are required for different situations.
2. The business valuation appraiser will then provide a proposal including the timeframe expected for the appraisal report and the cost expected. They will also request all internal documentation for the valuation, including financial data, asset information, and data on specific areas that may be unique to your business.
3. Next, they will take a look at what aspect of the industry your business falls into and what portion of the market share it holds, while examining key areas including finances, overhead costs, regularity of income, the actual market value of assets, and related documents. Intangible factors such as your reputation in the community, the desirability of the business location, and unique facets of the business will also be taken into account.
4. Using all of this information, the certified appraiser will develop their analysis and issue the formal report. This report utilizes standardized, accepted methodologies and is designed to stand up to scrutiny that will hold up in insurance, tax, and legal circles.
5. Once the report is issued, it will be reviewed with you to ensure it is an accurate reflection of your business and potentially make adjustments for any new details not taken into account.

By better understanding the process, as summarized above, you can better prepare and know what to expect when a business appraiser begins working with your firm. If you're not currently working with a certified business appraiser who has experience in your industry, please contact us and we will get things started for you.

When your business is within the retail sector, consumer confidence and market uncertainty can make all the difference in whether you are operating in the red or the black. But how do you adapt to changes in the market? One option to consider is a business valuation today so you can plan for the future, focus on your strengths and avoid the potential pitfalls of this industry. You can then adapt to changing market conditions and position your business to take advantage of the high points in the market while riding out the low ones.

Many people only consider obtaining a third-party business valuation when they are looking to buy or sell. The benefits gained during a retail store valuation now, regardless of your future plans, can provide you with valuable insights into your operation, and a better understanding of your overall assets and liabilities. This, in turn, gives you the tools you need to get your business through the difficult times while taking advantage of growth opportunities in the good times.

As an example, regardless of the timing, it is likely that your business has recently squeaked through an economic downturn as well as seasonal upswings in sales. Based on your experience, you would now like to consider growing your business by adding a new location or merging with a competitor that hasn't fared as well. In preparing to manage the due diligence process, you need to know what your business is worth, whether it's to secure the financing and investment you need, or to know where you stand in comparison to competitors. By learning this information, you can better negotiate the terms involved in the potential transaction.

The certified independent appraisal report you receive should have all information you need including a report on your market sector as a whole and its anticipated growth or loss in the upcoming years. A look at your competitors should also be included, detailing how they compare to you in the market. Your assets and liabilities are reviewed, giving you valuable insights into the areas you may need to upgrade or replace that are inefficient or even failing.

As a result, you may see innovative approaches to customer support that strengthens your business' overall stance in the market sector. The appraisal may even help you look at your online presence and level of digitization, as well as how that capability is expected to allow your business to expand into new markets.

In summary, you'll have the supporting documentation you need to get that loan for a new location opening or to improve and expand your existing business processes. You can make smart, informed decisions on what needs to change in your company to boost its performance and see where you should continue to invest for future growth. Obtaining a retail business appraisal from a certified experienced valuation firm is one of the best ways to gain these insights into your company which, in turn, will provide options that allow you to adapt to meet changing market demands.

When you've worked hard to position your business for expansion, it's difficult dealing with the likelihood that not everyone sees the potential growth right now, when you most need them to. If you need to get more today for your business' future plans, you need partners who can help you obtain everything you can in today’s market.

Valuing a rapidly growing company is a challenge, but well worth the effort when it's time to consider a new investment, or possibly merging with another operation. The same can be said for those looking to invest in or even purchase the business.

There are several reasons you see the potential for rapid growth in your company. New market expansion, increased product and service demand, higher commodity prices, and changes in your operating efficiencies are just a few. Whatever the reason, your company is growing, and you want to take advantage now. Where do you go to make that happen?

A common, less effective way is to simply discount the value of that growth over a short-term, fixed future period, ultimately dictating a lower than expected business value thus, receiving less consideration than you should. On the flip side, you may overestimate the growth rate, and over-leverage your position as the value is not supported by realistic growth expectations.

The best option is to hire an experienced, certified appraiser to perform a company valuation. One who has experience in your industry and with growing markets in general. But what does that appraiser base the company's value on? Here are a few areas they typically consider:

• Future Earnings: How much is the business forecast to earn over the next several years? If it's realistically and materially higher than in the past, it will be taken into consideration when determining current business value.
• Market Conditions: Is the market booming, with many businesses within that sector seeing strong returns? If so, how long is this trend expected to continue? Much like the housing bubble and the dot-com crash, trends may change, though strong companies that are well managed through may expect to see a stronger market share in future upswings.
• Innovation in the Industry: Is your business viewed as a leader in innovation or does it create the same basic products and services as every other company across the industry? If you have a history of innovation, it can be reasonably expected that your growing company will continue to see strong growth, supporting a higher value.
• Goodwill and Reputation: Does your business have a reputation for excellence in the industry? A strong reputation can make a huge difference between reliance on one-off sales or loyal, committed customers who come back for your services and products time and again.

The work you've put into your business to prepare for expansion and take advantage of opportunities as they've arisen deserves to be recognized and rewarded, and valuing a growing company is a great way to substantiate that effort. A certified business appraisal conducted by an experienced valuation professional lets you take advantage of these future earnings, allowing you to benefit today from the forecasted plans.

Savvy business owners and executives know that obtaining independent updated valuations of their company is a vital part of maintaining a sound, overall financial picture. When your organization has branches all over the country, how do you ensure you're getting the same quality of service and reliability at all these locations if you are using a local appraisal firm? One solution is to consider using a national business valuation service, which provides your company with professional appraisers who have valued businesses in every state and understand the broader marketplace your businesses operate in.

How are these types of valuation firms different than local single location valuation companies? Let's find out:

What are National Business Valuation Services?

If your company has multiple locations, and an updated independent business appraisal is needed, it makes sense to have consistency in the quality of the work as well as the methodologies used to measure value. This ensures the firm providing the valuation is familiar with your industry across all regions of the country and can provide the same level of service while following consistent guidelines and procedures for all of your operations.

A national business valuation firm will assign one project manager to handle the entire workload, so you only have to communicate with a single person throughout the process. Their job is to handle the day-to-day details of obtaining the documentation needed from your business as well as managing any other appraisers involved in the valuation effort. This beats the alternative of potentially having to work with multiple companies or individuals while taking a chance that a local appraiser might not be qualified to manage a much larger project.

The end result is a reliable, supportable valuation completed by certified, experienced appraisers with a consistent methodology that provides your company with the information needed to understand your current and future needs as you evolve into the next stages of your business plan.

Business Valuation Specialists LLC is a national business valuation firm that has been providing appraisal services across the country since 2003. Our highly-trained, qualified appraisers are Certified Valuation Analysts (CVAs) through the National Association of Certified Valuators and Analysts. We are available anytime to help answer questions you may have about getting a quality business appraisal performed on your company.

When you seek financing to purchase a business, it is typical that potential lenders will require an independent valuation to ensure the deal is sound. They want to confirm the sale price is reasonable and the business itself is financially viable, to mitigate the risks involved with the investment. Learn what it means to work with a reputable valuation firm to better understand this important part of the loan approval process.

Is a Valuation Required for a Business Loan?

Many lenders require that you have a company valuation performed by an appraiser. If your loan is backed by the Small Business Administration (SBA) or a similar government-backed program, they will often require an appraisal. SBA loans cannot exceed the appraised value of the business, inclusive of any real estate or equipment assets being acquired as part of the sale. Private bank lenders will have similar guidelines for business appraisals for financing approval.

As the buyer seeking the loan you should have additional money-raising plans in place, should the appraisal come in lower than the purchase price of the business. You can decide to raise the funds through private equity, use personal capital to make up the difference, or even go back to the seller and renegotiate the sale.

Ultimately, the appraisal protects your interests as a buyer, as well as the bank's interests as a lender. It may not make financial sense to purchase the business at a premium above what it’s worth unless you have ulterior reasons for doing so. For example, in a seller’s market, where there were other bidders involved in the sale process, or if you needed to acquire the business as part of a growth plan. Either way, it is better to understand the true market value of the business and have all financing options in place before you close the deal.

What Happens During the Business Appraisal Process?

The bank may select their own valuation firm to do the appraisal or have you select someone. In both cases, ensure the appraiser is certified, with sufficient training, knowledge, and experience to adequately complete the valuation. The appraiser will perform independent research on the business and review your documentation to estimate the worth of the company. They will rely on commonly used methodologies, such as the asset, income, and market approaches.

As the buyer, you will need to facilitate the process of working with the seller, lender, and appraiser to ensure the documentation needed is available and accurate based on your prior due diligence review. It is in the seller's interests that the appraisal meet their price too since they want the deal to close.

Once the valuation is completed, a report will be prepared and submitted to the lender, who will distribute the report to the appropriate parties. As a buyer, you should review the report to better understand the valuation of the business and its associated goodwill and tangible assets. You may also want to consider using the report to assist in insurance, tax, and accounting purposes.

In summary, you can rest assured that if an appraisal requirement coincides with you obtaining the best financing option for your new company, Business Valuation Specialists LLC will be there to guide you through the process efficiently and effectively.

When you're selling a business to a third party, the topic of appraisals may arise. But why is it important when you're selling your company, and what difference will it make at the end of the day? A formal valuation of your company is one of the key components that drive the transaction. Here's why:

Why Business Valuation is Important When Selling a Business to a Third Party

When you're planning to sell a business to someone you don't know, you want to make sure everything is done fairly and equitably. Completing an independent, certified, third party appraisal early on is the first step to ensuring this happens. By having an appraisal performed, you can see where your business needs improvement, and learn where it is already strong so that you don't have to put further effort into areas that are already in great shape. Once you've made changes and improvements in those areas that required them, your business should increase in value, allowing you to realize the benefit from your actions and detail these updates to potential buyers.

If you're like many business owners, you know that your company should be worth more than the assets on the balance sheet, but may not know exactly how much more. By having a certified business appraisal in hand, you have a better idea of what that figure should be, and can consider offers that are reasonable while dismissing those which are not. You can also decide if you want to ask a price that is in line with similar businesses in your market or if you feel you have a unique position that should be accounted for, ask something higher for that consideration.

Having a formal business valuation helps you at the negotiating table. Because a certified appraisal is based on accepted standardized methodologies, it represents best appraisal practices and procedures, and can also be useful in legal, insurance, and financial circles. If you want the potential buyer to come up in price, providing them with a copy of the appraisal report may make them aware of facts and circumstances about your business they may have previously been unaware of. This gives them a legitimate supportable reason to either change their initial offer or meet a counteroffer you've proposed to them during negotiations.

Business appraisals are vital to your success when selling a business to a third party. If you're getting ready to sell your business and haven't contacted a business valuation firm, please feel free to contact us today. Our qualified business appraisal specialists are ready to help you get the maximum benefit from your business sale.

If there's anything certain in business, it's that dealing with the government is probably going to take longer and be more complicated than you'd like. There are, however, several agencies that help small businesses, including the Small Business Administration (SBA) and the United States Department of Agriculture (USDA). These agencies offer popular loan programs with great rates and flexibility while working with your local banks to get you the financing you need to grow your business. Local banks oftentimes receive guarantees from the SBA and USDA that loans will be paid back to the lender if the business fails. For most of the loan programs, these federal agencies require a business valuation be performed as part of the approval process.

How can a business valuation help secure an SBA loan?

• A business valuation performed by a certified business appraiser ensures that the valuation has been performed independently with no bias while using accepted methodologies. This means that you will receive an accurate picture of your company's value and the SBA understands the loan they are guaranteeing is being measured against your company’s current worth.
• Business owners sometimes make the mistake of basing their company's value on tax accounting records. Though these documents are accurate and useful, they don't specifically reflect the appraised value of the business. A review and analysis of your tax returns and financial statements over a 3-5 year period will be better suited to properly value your business.
• Having an appraisal performed also helps you understand what condition your company is in. There won't be any surprises when you go to pay back the loan and realize there's an issue with your cash flow, industry position, expected income or similar concerns. You'll know where your company is strong and where it needs improvement. A business appraisal gives you a solid look at how your company is performing and where you need to invest more time and effort.
• SBA guidelines allow lenders to perform their own company valuation if a loan is for less than $250,000 but requires an independent certified appraisal if the loan is higher. You may want to complete a business valuation regardless if you believe the bank doesn't have a solid grasp of your business or industry and is limiting the loan terms, or you just decide it prudent for other business considerations.

By having a business appraisal performed on your company, you're doing more than just ticking off a box on a checklist, you're finding out valuable information about the health of your company's financial situation. Business Valuation Specialists is ready to help you.

Transferring ownership of the family business requires care and planning to ensure a smooth change of leadership. One frequently overlooked tool that can assist in the transitioning of the business to family members is a company valuation. Learn how getting the family business appraised can benefit all the relatives and related parties who work for the company.

Why You Should Obtain the Valuation Before Transferring Leadership

Imagine if you transferred the family business over based on a “ballpark” value thrown out by one or more of the current members involved. Older relatives who held leadership positions might be expecting a large payout. Others may have assumed the payout was certain and planned their retirement lifestyle on it. When the valuation of the company is not formally established by a certified independent appraiser when leadership transfers, the grounds might be set for a generational dispute if there is no real agreement or understanding of the true value.

If you engage the services of a business appraiser, the resulting analysis and report would act as an objective neutral framework for the company that would guide all the family members involved. While the appraised value might fall short or potentially be higher than the perceived value, the process of getting the business appraised will take some of the emotions out of the leadership transfer.

Once everyone understands the true worth of the company, you can allocate the fair market value by the number of shareholders, and provide the owners with an idea of their retirement income, and plan for the next steps with the transfer of the business.

The appraisal can also help manage expectations and allow the new leaders to chart a course forward with confidence that they have all the facts needed to succeed. Instead of causing strife, the change of leadership can now strengthen family unity.

Getting Family Business Appraisals for Tax Purposes

Not only is it important to have the company appraised from a personal perspective, but it is also necessary to do so for tax purposes. The IRS requires that businesses not subject to a special provision be valued at "fair market value" for federal tax purposes when the business is transferring family leadership. Fair market value denotes the price that a buyer, not related to the willing seller, would reasonably pay for the business. Since most company owners cannot objectively determine fair market value, a business appraisal will solve this requirement.

If the IRS were to ever examine the business transfer or audit company taxes, the appraisal can prove that the company's value was treated as "fair market" for the purposes of transfer.

If you sell the business to your relatives for less than fair market value, the new owners could be penalized with gift or estate taxes. Selling for fair market value is the best way to avoid this and ensure a smooth transfer of ownership.

Planning Your Business Appraisal

Now that you are aware of how a business appraisal can assist with the transfer of your family’s company, take action by finding a qualified appraiser. It is well worth the time spent to find an appraisal professional who understands your industry and your geographic locations, given that these two variables can directly affect the company's appraised value. A certified business appraiser will also have the experience and credentials needed to support their value conclusions.

Business Valuation Specialists can assist you in this process from beginning to end. We have the qualifications you are looking for and the experience you need to provide an accurate appraisal that will help you through the transition process.