Business Valuation Blog | Understanding Buying / Selling a Company

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.

If you are considering selling a business, ask yourself: Do you want to optimize the attraction to prospective buyers? Do you want to position your business for a fast and fair sale?

If the answer to either of these questions is yes, then you need a company appraisal to help establish value and properly guide a successful sale. Here are more reasons why you should engage a certified business appraiser before selling a business you have worked so hard to grow.

1. An appraisal gives you an objective formulation for business value - Preparing to sell your business is a highly emotional time. For many business owners, the sentimentality risks clouding their judgment and causing them to act against their best interests. When selling a company, getting a business valuation from a certified appraiser means you receive an objective estimation of value that you can use to review potential offers. When you have an independent valuation of the company, you will not miss out on a reasonable offer from stubbornness or sentimentality.
2. Shorten the time-to-sale - Too often, business owners get into a lengthy sales process because they fail to understand the true value of their business and misrepresent a reasonable asking price. During the valuation, the appraiser can estimate the present value of the business and support this analysis to the owner. With the proper knowledge, the seller is more likely to price the business competitively and obtain market driven offers. This results in a shorter time-to-sale than when an owner prices the business without backup and ignores offers that truly are in good faith.
3. Position yourself early for a successful sale - If you want a successful deal, you will seek a business valuation well in advance of the sale. Getting the appraisal ahead of time helps you by providing an actionable list of ways to make your business more profitable when you go to sell it. After seeking an appraisal, you can tackle items on the list to make your business more desirable to potential buyers when you go to market.
4. Lends you credibility - When you want to sell your business, a potential buyer will want to know that the financial data they review makes sense. Whether you are claiming to have a customer base of 100,000 or generating $5 million in revenue per year, a third party is going to want to investigate these claims before purchasing. The appraisal will facilitate this verification process, enabling the bidder to review the valuation report as part of their due diligence.
5. Prevents you from undervaluing your business - While many business owners tend to overvalue their business, it is just as possible to undervalue it. Setting too low an asking price when selling may undermine the potential profits you could make.

In summary, accuracy is the key to selling your business efficiently and for a fair value. Turn to Business Valuation Specialists for help finding a certified appraiser who has experience performing appraisals for companies just like yours. The appraisal will greatly assist in helping you determine an asking price so you can advertise your business opportunity with confidence

You are 55 and your employer of 15 years tells you that the company is going in another direction and your services are no longer needed. Suddenly, that six-figure salary you were receiving is gone. What are you going to do? Finding another well-paying job will not be easy and the thought of an extended job search is unappealing. Maybe you should create your own job and buy a business?

You are 30, in your prime, and ready to conquer the world. At work, you still feel like a small fish in a big sea. One day you realize that this is not the life you want so you give your notice in anticipation of something better. Buying a business will make you the big fish and gives you the opportunity to control your own destiny.

No matter what reason you may have for wanting to buy a business, you should take your time before making this decision and ultimately offering up a lot of money to purchase an existing business. First, ask yourself these questions:

• Are you sure you want to own your own business?
• How much time are you willing and able to devote to running it?
• Is the risk worth taking if it means giving up a high-paying job?
• How will it affect your family?

It is easy to get caught-up in the emotion and excitement of the moment and make hasty decisions. To be sure you are not paying too high of a price, and are getting into the right market, you should understand the real value of the company you are interested in purchasing.

A business appraisal provides you with a supportable estimate of the company's fair market value. It serves as a reference point for making an initial offer and makes it easier to negotiate a final sale price.

How are Business Appraisals Completed?

1. A business valuation starts with a conversation or communication with a business appraisal company. It provides an opportunity for you to give some basic information about your intended company to the appraiser who, in turn, will talk to you about the valuation process. You should feel comfortable that the company you are talking to has the expertise and experience to qualify as a certified business appraiser.
2. The next step is to get a quote for your company's valuation. The amount you are quoted is based on the things you discussed during your initial consultation. Among the things that can affect the amount of the quote are the size of your company, the detail of the appraisal, and the length of time it will take to complete the appraisal project.
3. Once you get the quote, you are under no obligation to have the appraisal done. You are not penalized for changing your mind. If you accept the quote and want to proceed, you will need to sign an engagement agreement which then commits you to the valuation effort to be put forth by the appraiser. In many cases, the current business owner will be willing to cover a share of the costs to complete the work.
4. You will then be asked to complete a business questionnaire and submit prior tax returns and/or financial statements. Most owners who are anxious to sell their business will provide the necessary documentation about their company so a company valuation can be done. If you express serious interest in buying a company, and the owner will not provide tax returns and other financial documentation, be suspicious. It may be an indication that the owner is asking more for the company is really worth.
5. Assuming that you are given access to the financial records of the company you are looking to acquire; the data and information is analyzed by the appraiser and a valuation report is generated. After receiving the report, you can discuss the results with your business appraiser.
6. You are now ready to make effective decisions and negotiate a reasonable sale of the company you may be running in the very near future.

When you're considering having a business appraisal completed, there are different options available. One option to consider is the discounted cash flow analysis, which is based on a company's income and growth by calculating the net present value that future cash flows will bring into a business.

How does a Discounted Cash Flow Analysis work in the Context of my Company’s Appraisal?

A discounted cash flow analysis looks at the expected future income, or cash flow, of a company over a reasonable time period. If your company is expected to have a particular percentage of growth based on a certain percentage of the business’ weighted average cost of capital (WACC) for a set period of time, the expected cash flow over that time period can be calculated. In essence, the estimated value of a company will rely on those forecast numbers to drive the appraisal. WACC is a recognized variable in every business based on the company’s debt and equity structure.

How Discounted Cash Flow Differs from Other Types of Valuation Methods

There are three approaches commonly used in business appraisals, (1) which involves strictly reviewing current assets; (2) a market driven approach; and (3) basing the appraisal on income. A discounted cash flow approach is based on an income assessment, however, taking it a step further, by not only including current income but projections about future income and the effect growth has on that figure. It often produces one of the higher value estimates for business valuations as it looks at what the company will do in the future, typically seen as a best-case scenario.

The Valuation Process Explained

The steps involved in this type of business appraisal include (1) Deciding how far out to forecast your valuation, (2) estimating the rate of revenue growth by calculating profits after taxes, working capital needs and estimated expenses, (3) calculating free cash flow based on previous figures, which can then be compared against current income statements and future operating costs based on the company's prior performance, and (4) calculating the discount rate.

Though it is acceptable to appraise your business off of past performance, doing so may not take into account potential changes to your company and future external economic effects. Some factors that help to better understand these are thinking about what the company's sector and its future development are as a whole, how well your own assets will hold up, and whether supply and demand pricing will remain the same.

There are different approaches to completing this analysis, and it is best left in the hands of an experienced appraiser to determine which one will best reflect future business performance.

In summary, a discounted cash flow valuation can seem overwhelming however, the results can provide benefits for your business in terms of projecting and recording market value today and in the years ahead. Working your way through this process will assist in discovering where your business’ future is headed.

When you want to sell your software company or need a better understanding of the value for business you have worked so hard to build, you need to consider an appraisal. The software industry differs from most others, so how does this factor into a business valuation? Understanding the methodologies involved with the appraisal of your software business can help you make sense of the current market and your place within it.

There are two main approaches to value within the business appraisal world: the income approach and the market approach. Both can be used to value a software company, and a business appraiser will select the best method depending on the reasons for appraisal and the data available for analysis.

For the income approach, an appraiser focuses on the current and future benefits of your business in terms of revenue and expenses. They will utilize this information and discount it in present terms. This is referred to as a discounted cash flow (DCF) of your business.

This approach is appropriate for companies that bring in an unstable amount of earnings from one year to the next, or companies that are not growing at a consistent rate. Since many software companies do not grow at a steady pace, and commonly see material fluctuations for revenue and expenses, an income approach makes sense.

A market approach can also be used for taking the valuation of a company in the software industry. This is more specifically referred to as the multiples of revenues and earnings market approach. In this method, an appraiser looks at the software company's historic financial statements to determine values. The appraiser then compares the software company's values to its peers.

Factors That Affect the Value of a Software Company

Factors that may affect the value of the software company include among others, tangible assets owned, the replacement cost of the software itself, the value of similar businesses (possibly competitors), customer acquisition cost, and measurable advantages to your products

Since there are many factors that affect the value of your software company, you should know what method an appraiser will use, the factors they consider, and how they put this data together to arrive at your company's overall value. Talk with the appraiser during the valuation engagement to better understand what the appraised value really means.

A recent forecast by the American Rental Association projected an astonishing $71 billion in revenue for North American rental company businesses by 2023. What does that say about the future of your equipment rental company? Are you in a good position to take advantage of this growth? Many companies find that having a business appraisal performed helps when positioning a company for upcoming growth. Here is how:

When a business appraisal is performed on your company, you gain access to insights into your business, your industry and the market as a whole. Business appraisals look at many factors in your company and how they interact internally and external to the overall industry. Most business appraisers will look at your finances, processes, overhead, market share and similar areas to determine final value. This can vary depending on the purpose of the appraisal, whether it is for a merger, partner buy out, or to determine the financial health of your company.

As an example, an equipment rental business has a lot of money in their tangible assets. The value of that equipment declines overtime, however, that does not mean the value of the business as a whole will go down, especially if you are investing in upgrades and replacements. Even though these vital assets may be the first thing you consider when calculating your balance sheet, there is more to the picture than just the rental equipment.

Your reputation in the market, competition and community goodwill are just some of the intangible factors that come into play during a business valuation. An appraiser will look into all these components of your company during the appraisal process. A certified business appraiser has the industry experience and only deals in valuation work, which allows for the focus needed to provide accurate supportable conclusions of value.

By taking the time to have a quality business valuation performed on your equipment rental company, you can make the changes needed to take advantage of the planned industry growth. Do not sell your business short. At Business Valuation Specialists, we can connect you to an experienced appraiser who can determine the value of your company and help you take advantage of the anticipated market conditions.

Three similar types of businesses greatly impacted by the COVID-19 pandemic and frequently in today’s news include day spas, beauty salons and hairdressers. Whether you own a small barbershop providing haircuts and shaves or have a chain of multi-faceted spas offering many types of services, now is the time to consider the current market value of your company.

Obtaining a current business valuation will offer you an advantage if you are considering buying, selling, refinancing or taking advantage of available government incentives provided during 2020. The ability to manage your business efficiently and successfully through these unprecedented economic times thus far is a testament to your entrepreneurial prowess. Now it’s time to look at the next steps of potential growth and take advantage of a market where new opportunities may arise.

A current business valuation is important both for your existing company’s growth plan and for other businesses you may be considering that would complement that growth plan. In today’s challenging economy, understanding the true value of your business will allow you to better recognize and capitalize on opportunities ahead of your competitors. It will also help prevent you from making costly investment decisions. Additionally, once you have obtained a business valuation from a certified business appraiser, and by updating it periodically, you will remain fully informed of current market conditions, enabling you to continue staying ahead of your competition.

A certified appraiser at Business Valuation Specialists will work closely with you as an owner operator. They will walk you through the process and provide insight as to the information needed to analyze the value of your company with past, present and future scenarios considered. Since we are nationwide, our appraisers are in a position to best assess your business within a particular geographic market area and the forces that act upon and within it. Your completed appraisal will therefore give you a powerful data tool when making future business decisions.

When you’re considering obtaining a business valuation to purchase, sell, refinance or buyout an investor in your company, or for any other reason, it makes sense to obtain a tangible asset appraisal to accurately assess the market value for your owned equipment and real property.

Quite often, business owners will have capitalized a significant amount of tangible asset cost as part of their operations for depreciation and tax purposes, however, years later, when it comes to updating the overall company value, they assume the internal net book dollar amount on these assets is a fair representation of actual market value, which in many cases is not accurate and could potentially result in money left on the table.

If a current tangible asset appraisal is not available in a business valuation, the certified appraisers will need to use the net book value of these tangible assets as reflected on the company’s financial statements, as this is the only available source of data. These net book values may be substantially different than the actual market value of the equipment and real property, which would create inequities in the appraised value of the overall business. Having a true understanding of all these important components of your company will allow you to make sound decisions going forward.

When completing a business valuation for any company, it is important to properly allocate the value to both the tangible and intangible assets of the company based on current market conditions, which will then gain you a full perspective on how to approach sale, purchase or refinancing opportunities.

The appraisers at Business Valuation Specialists (BVS) can discuss this issue with you during the valuation process. We have tangible asset appraisers on hand through our sister company Equipment Appraisal Services (EAS) as well as strong relationships with real property appraisers. Obtaining a business valuation appraisal together with updated equipment and real property appraisals will provide you with a full and complete picture of your business’ actual total worth allowing you to make highly informed business decisions with confidence and provide a competitive advantage.

Many hard working individuals have opted to leave the confines of larger corporations and create their own businesses based on the experience and expertise they have achieved during the earlier years of their career. Whether you have an engineering or manufacturing background, or run a woodworking or interior design operation that is guided by your own day to day decisions, obtaining a current certified independent business valuation is important in many ways.

It is always a smart decision to gain a clear and independent understanding of the true value of your business.You may be considering selling at a peak point in your operational cycle, or perhaps looking to create a new business development model. It may be important for you to raise capital to expand your current operation or to purchase a new business as a means of growing your company. You may even wish to simply leverage the equity you have already created for upgrades and improvements. The advantages a certified business appraisal will provide to you will be invaluable given any of these scenarios because you will have a clear understanding of what your business is worth in today's market.

Working closely with you as an owner operator, the certified appraisers at Business Valuation Specialists will walk you through the process and provide the insight you will need. They will analyze the value of your company with past, present and future scenarios considered, thus insuring you are able to make informed choices that will positively impact your business. A certified appraisal from one of our independent appraisers will also stand up to legal scrutiny thus giving you the peace of mind and confidence you will need to make crucial decision regarding your business.