Business Valuation Blog | Understanding Buying / Selling a Company

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.

A business valuation calculator can provide you with quick insight into how your business is performing and what it might command for sale on the open market. Is this calculator really an effective replacement for obtaining a formal valuation of a company by a certified appraiser? Learn what a business valuation calculator can, and cannot tell you about your company's worth.

What is a Business Valuation Calculator?

A business valuation calculator is a simple tool that allows you to gauge the worth of your company by entering your total earnings, along with other variables, in a fiscal year. Add to your earnings the taxes paid, amortization, net profit, and interest, which is sometimes referred to as EBITDA, to estimate total earnings. By providing earnings data, along with an estimate of your annual growth, industry risk, marketability discounts, and related factors, the calculator can give you a range of values for your business using certain standardized formulas.

A calculator is a useful way for small business owners to get an independent idea of what their business is worth. However, it is no substitute for a business appraisal from an experienced valuation firm that understands the market you operate in.

Business Valuations vs. Valuation Calculator

Business appraisers not only review your income and earnings to calculate the financial worth of your business, they also integrate industry-specific trends and forecasts into the valuation. Since business appraisers take the time to research your business, community, and your assets, they add in subjective variables that would nonetheless affect your company's value if you were to potentially sell it.

For example, if your business is located in a rapidly gentrifying part of town where property values are on the rise and people are flocking to the neighborhood, your value may increase as the neighborhood gets more attractive. On the other hand, if your company is located in an out-of-the-way area, and business has been declining, it might be worth less.

A calculator has no way of knowing this level of information about your company. As a result, the information it provides is only accurate to a broad extent. Were you to rely on the calculator alone to evaluate your company, you might settle for too low of an offer or set an unrealistically high price for your business.

While a calculator is a useful, no-cost check on your business’s worth, it is not detailed enough to be considered a true benchmark. If you are seriously contemplating selling your business, raising capital, refinancing, expanding, or even acquiring a company, you should engage the services of a certified business appraiser. If you would like to get a professional valuation of your business, find an appraiser who is credentialed by a reputable industry organization, such as the American Society of Appraisers (ASA), or the National Association of Certified Valuators and Analysts (NACVA), who can explain the appraisal process to you. Since you will want to rely on the appraiser's report to assist with your business goals, you will need to understand the logic behind the valuation.

Business Valuation Specialists offers business appraisals for a broad range of industries. If you have been holding off getting an appraisal because you have not found someone who understands the particulars of your business, give us a call. We have the qualifications you are looking for and can provide you with an accurate appraisal that will help you decide what is right for your company.

It's no secret that small businesses are more flexible than larger companies, able to change production, focus, and market more quickly than their larger counterparts. With this change, though, as a small business owner, how do you ensure you're not exposing your enterprise to excessive risk that could cost you valuable revenue and profits?

Valuing a small business enables you to see into the nuts and bolts of where your company is strong and where it needs improvement, allowing you to manage risk more effectively to take advantage of opportunities as they become available.

Maximizing Flexibility

There's no doubt that the ability to nimbly change direction is one of the greatest advantages of small businesses over larger companies. However, changing direction requires that you know the condition of your business before commencing change. Will an evolution take advantage of market conditions or will a different business environment create growth for your company? Or conversely risk slowing it to a stop, even possibly putting it and everything you've worked for at risk?

To take maximum advantage of changes in your market, you need to know exactly where your business stands to determine where and when to make changes. One of the easiest ways to achieve this goal is by engaging a certified business appraiser to provide an updated valuation of your company.

Knowing Strengths and Weaknesses

How does the valuation of a company help you make it more flexible? All businesses, markets, and owners have different strengths and weaknesses. Knowing where your company lies through a small business valuation provides you with the information on whether an opportunity is a good one that plays to your strengths, or otherwise leaves you open to significant risk with the potential loss of market share. Business valuations are one of the best ways to determine where these strengths and weaknesses lay, whether it's in undervalued equipment, overvalued assets, or poor cash flow issues.

Reducing Risk

Valuing a small business allows you to know whether taking a particular approach to the market is a good idea or not. Business appraisals may help you determine whether your regional location has changed in market share, or what your expected business income may end up being when you've had inconsistent revenues and expenses in the past. You may be able to determine the change in your business is based on a recent boom in the market and if that boom is a short or long-term trend.

If you're considering a merger or partial sell-off to expand or reduce your business, will the new company reflect your strengths or pull it down by exposing weaknesses? By knowing where your company stands within the structure of a business valuation, you can make decisions that will leave you stronger instead of opening you up to needless risks.

By having your business valued by a certified appraiser, you can increase the chances of making good business decisions that will keep your company in the black and growing. Taking the time to have an appraisal performed gives you another tool and the added insight to help ensure you will be successful. If you need assistance finding a qualified business appraiser, please contact us today. At Business Valuation Specialists, our highly-qualified valuation specialists are waiting to help you succeed.