Business Valuation Blog | Understanding Buying / Selling a Company

 

In the small business arena, where the vast majority of US companies compete, there always seem to be new challenges and obstacles confronting many owners and employers each year. This couldn’t be any more evident than what we’ve all experienced over the last 2+ years as COVID-19, supply chain crises, inflation, shifting energy market policies, the Russia/Ukraine War, investment market downturns, and unreliable messaging have all impacted small businesses in one way or another.

Through all these developments, it seems small businesses are the ones left to fend for themselves while large corporations leverage these issues for their own gains. It might be easy to listen to all the noise and share in the complaining, however, wouldn’t it be more advantageous to focus on your company’s specific challenges, while carving out new paths to stay profitable and find growth opportunities while others are being overly reactive?

While all these compounded issues have created very significant challenges for many small business owners, many have faced these types of hurdles in the past, whether from revenue and cash flow reduction, vendor price increases, delivery delays, or employee and client retention. The most successful small business owners are continuously looking for ways to refine and improve their business practices, even in the best of times. Being proactive on a day-to-day basis while continually posing relevant questions to yourself, your peers and employees will allow you to stay ahead of the curve and be prepared when these challenging issues arise.

Don’t be afraid to take risks and invest in areas where you see new opportunities for growth or greater operational efficiencies can be developed. Challenge the rest of your team to do the same and humbly realize the more support you have from loyal employees who can assist in these efforts, the better.

Consider being a unicorn, and dare to make decisions that appear unconventional today, but could turn out to be revolutionary tomorrow. The less alike you are to the rest of your competition in certain value-added areas could easily have a positive effect on how clients view your products and services compared with those in your market. Improved communications, deliverable timelines, and customer service are just a few examples to consider.

These changes will likely create more demands on you as a business owner, as well as your employees, however, the eventual payoff can be critical in overcoming the sum total of the challenges faced as a result of the external forces affecting your business.

 

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 are distinct differences between companies that provide a third-party service to their clients versus those which create products for sale to other manufacturers or end-users. Examples of service providers would be banks, financial advisors, insurance companies, vehicle repair shops, salons, spas, hotels, medical facilities, consultants, and appraisers. These services would be considered intangible goods.

Product manufacturers create tangible goods from raw materials while selling at a wholesale or retail level, depending on the end product and client base. They may act as a parts manufacturer for a larger manufacturer, such as automotive or aerospace companies. Others may produce end product goods that are sold in stores and other retail outlets. Sporting goods, furniture, clothes, food, and health supplements to name a few.

Some service providers may also offer tangible products that complement their business, however, these products are typically manufactured by other companies, and so act merely as a retail outlet to these producers.

Besides the obvious distinction between products and services, other variances of note would be how these companies are affected by changing markets and economies.

Manufacturers are oftentimes reliant on other companies who produce the raw materials necessary to build their products. Therefore, supply chain issues such as those faced today can have a negative impact on their ability to maintain normal levels of production. Even if supplies are available, prices may increase from their suppliers dealing with these issues, which will lead to price increases or cost-cutting concerns to maintain market share.

Service providers typically don’t face these supply chain issues, however, in an inflationary economy such as we have today, their customer base may decide to hold off on spending the money for their services, creating challenges to maintaining or growing revenues.

For small businesses, these types of challenges are always present, however much more so than in the last 2+ years of unprecedented global and local economic concerns. To survive and even thrive in these environments, regardless of the challenge, takes a savvy business owner who can think both short and long term to create opportunities where others see roadblocks.

Understanding the most critical components affecting your business, year in and year out, whether your company is a service provider or manufacturer is the first step toward realizing solutions to combat these challenges. Making adjustments without sacrificing integrity or quality is the key to becoming a long-term successful business. There will come a day when the world looks much brighter, so do what you can to prevail in today's battles, so you can win the war.

 

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.

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.

In the aftermath of the pandemic and in consideration of continuing economic hardships for many businesses in highly affected industries, such as restaurants and entertainment venues, the reality is that a lot of companies did not survive. These unprecedented times saw a large increase of small business owners struggling to stay afloat in hopes of a turnaround that ultimately took too long to come about.

Despite short-term relief funding programs made available by federal and state governments, there has been a significant increase in small business closures beginning in mid-2020 and continuing to this day. One of the many obligations business owners are required to undertake when closing their company involves a formal discharge and dissolution filing with the IRS.

There are several filing forms involved and depending on the existing documentation, owners may need to engage with a certified business appraiser to independently declare a final value for tax purposes. Even though it is evident that little to no revenue is being generated from business operations, there likely remain certain assets and liabilities which need to be declared as part of these final steps.

As painful as it may be, a business appraiser will need to be engaged and review these documents as part of their work effort to establish a fair net value for the remaining tangible and intangible property. Essentially, the focus is on what remains of the business that can be resold as part of the closure.

In many cases, this would be tangible property only, such as real estate, buildings, machinery & equipment, and personal property. If these assets have recently been appraised or are reasonably depreciated and accounted for on the company books, the business appraiser can use this data to document under an Asset Approach to value. This approach will likely be the only one utilized given the lack of income and external market comps considered under more normal business valuation circumstances.

Other factors will be taken into consideration that pertain to the closure status which will hopefully soften the final blows that come with this process. Making the decision to close your small business for lack of profitability, or for any other reason, can be a heartbreaking experience, and as business appraisers, we will do all we can to facilitate this process for small business owners during these trying times.

Our blogs primarily cover topics related to the appraisal of small businesses however, there are other options for owners who may be in the middle of a potential purchase, sale, investor buyout, or dispute where a recent valuation exists, and there is a need to obtain an independent opinion on the reasonableness of the conclusions in the report.

This is considered a consulting or review engagement where a certified business appraiser will review relevant documents, and provide opinions as to the approaches, methodologies, and conclusions developed to arrive at a value for the company.

Review work is a more informal process where the consulting valuation professional will develop opinions of work already completed and potentially offer alternative perspectives as to valuing the business. Ultimately, they may determine if an adjustment is warranted to the value concluded upon in the report while providing support as to why; or they may state that the appraisal was well conducted and the value conclusion credible.

The review appraiser may also provide an opinion as to the credentials of the appraiser and the overall quality of the written report from a compliance perspective.

Much of the work that goes into a valuation review and consulting assignment is consistent with completing a business appraisal, given the need to support why the existing report conclusions may be reasonable or not. The primary difference is that the review appraiser is not completing a formal, certified appraisal report of their own. A preliminary opinion of value may be presented as part of the deliverable, in the context of the work performed and documents reviewed however, it would not be considered a certified appraisal.

In summary, these types of engagements can be useful anytime there is a concern regarding the reliability of existing appraisals being used as part of a business transaction or in settlement efforts for a buyout or dispute. The consulting assignments are quite common in the valuation industry and offer an alternative option to business owners in situations where a completely new valuation report may not be necessary.

Consider engaging with an experienced certified appraisal professional when you enlist this type of work to ensure you receive a supportable, well-researched analysis, that provides the additional independent perspective needed to make the most informed decisions.

Believe it or not, Millennials are now in their late 20s and 30s and have become the most sought-after consumers of products and services for most commercial providers across all industries. Gen X and late-stage Boomers are still in the picture, however, over the last couple of years, it has become evident Millennials are making tremendous strides in gaining buying power due to a variety of circumstances.

In the valuation world, I have recently seen a growing number of young entrepreneurs and next-generation family members running companies with fresh perspectives that can’t be ignored, and will likely set the pace for the next 20-30 years of business development across the world. Many of these individuals have patiently bided their time during unprecedented events that have forever reshaped our future over the past few years.

Others have mocked them in the past for their habits and preferences, while underestimating their potential, and not realizing the vast majority of this generation are nothing like the stereotypical picture painted by so many who are engrained in “old school” mentality.

While it is generally true that Millennials had a tougher time breaking into the mainstream workplace a decade ago in a much different business landscape, they used conservative tactics in an effort to save money, such as living at home and holding off on marriage and family plans until more financially secure. This is somewhat of a unique circumstance created by this generation, however, we are now seeing the emergence of a hungry, wizened group that accounts for over 20% of the populace, well over $2 trillion in spending power, and 90+% employed.

Virtually every major entertainment event, both live and virtual, sees its advertising revenue campaigns geared toward these consumers, while the majority of the workplace is inhabited by those that fall into the Millennial generation. These trends, which have quickly grown over the last 5 years, are the building blocks for the future leadership of our nation’s business, economic, and political climate. It is not a surprise then, that this generation is becoming the focus of many service industries and product developers who realize that staying ahead of the competition will equate to favorable ratings from this group of individuals.

Millennials are the original masters of social media, and with venues such as Twitter, Facebook, LinkedIn, and Instagram becoming dominant platforms for advertising, it makes total sense that the two are becoming entwined with how future businesses will be run.

In summary, if you own a small business, and are looking for growth opportunities that have otherwise been difficult to develop, consider targeting the Millennial generation as a potential expansion to your client base, and look to keep up with this new and exciting group as they continue to take over the future.

If ever there was a light at the end of the COVID tunnel, it may be at its brightest today, however, the topic of broad-based remote employees becoming a permanent way of life has been discussed for a while now. Do you find your business in the middle of this challenging issue or is your company fully reliant on in-person employment to operate

Businesses involved in markets such as manufacturing, packaging, and logistics will always need certain employees on the “factory floor”, while service providers such as advertising agencies and accounting firms are finding it easier to allow a majority of their workers to have the option for remote or home offices, either part or full time. So many things we used to do in person can now be conducted remotely and virtually.

The fact is that the in-office, in-person dynamic is becoming a thing of the past, and while many employers are compelled to increase full-time remote workers, there are many challenges for both business owners and employees with this shift in the workplace.

From personal experience, I can confidently say that, for some people, it takes a long time to effectively and efficiently work from home, or in a remote office setting, with no hands-on supervision. There are dozens of ways to waste time and become distracted by influences completely outside of your job responsibilities. Working remotely can also hinder the ability to develop the kind of camaraderie many office environments afforded people in the past, which can be beneficial to creating a team dynamic and improving the business social skills of your employees.

That said, this shifting workforce dynamic is now considered the new normal and will continue to trend this way for many businesses in the foreseeable future. Employers will need to be more diligent in their hiring practices and employees should consider ways to eliminate distractions and develop habits which to balance home office work with some level of in-person company interaction.

Many business experts believe employees have all the leverage in the current market and that likely holds true for certain qualified skilled candidates. Most employers however are not naïve or desperate enough to allow their new hires to call all the shots. Career success inevitably comes down to overall work ethic, open-mindedness, and the ability to develop leadership skills while working in a team environment and ultimately becoming more effective than your peers. Employers now more than ever, should look to hire those with strong social skills, work ethic, and flexibility to go along with the technical skills necessary to do the work.

It will be interesting to see how the remote office shift in the workforce further evolves and how employers and their staff continue to adjust without sacrificing quality and efficiency and avoid a loss in overall business value.

Business owners who are enjoying steady growth over time with their sales volume moving ever upward will eventually need to determine whether it makes sense to subcontract out the extra work or consider bringing in a new hire on a part-time or full-time basis.

This decision depends greatly on the type of business you own, in that certain jobs involve tasks that can be accomplished from home or in the field, while others require the need to train and work within an office or factory environment.

For instance, as a business valuation and equipment appraisal firm owner, much of the time-consuming work for my employees revolves around field inspections and market research, while maintaining strong customer relationships and meeting delivery timetables. These job responsibilities lend themselves to working offsite in the field or from home.

Here are some other factors to consider:

• What are the maximum capabilities of your current staff? Can you structure an improved compensation plan for existing employees to benefit from this growth while not overtaxing them or potentially creating a lesser quality product or service given the extra work demands?

• This option should probably be considered and vetted before any others, as your personnel will appreciate the opportunity for growth. It will also help maintain positive morale if you ultimately determine the need for extra hires or subcontracting.

• Are you confident that your growth is a consistent pattern that will continue to develop or, could it be a short-term aberration due to unique circumstances in your market? It’s always a good idea to look back over the last 3-5 years of revenue and determine what created this growth and if there are inconsistencies or steady patterns to your sales.

• If you determine there is a strong chance the increase in revenue will continue in the foreseeable future, hiring full or part-time in-house will need serious consideration.

• How much training is required for subcontractors or new employees, and can you afford to bring in a seasoned professional who will immediately take the ball and run? Depending on your overall role in the business, you may have the time to train lesser groomed staff or freelance help however, if this is not the case, you may need to consider spending the extra capital to engage someone with extensive experience.

There is always risk involved when bringing in additional human resources. Taking a leap of faith with new hires or subcontractors can help ease the pressure and help you better manage growth leading to prosperous future outcomes, where the sky becomes the limit.