Business Valuation Blog | Understanding Buying / Selling a Company

How much is a business worth? This question has plagued business owners for centuries. Unfortunately, the answer to that question, as to so many in life, is that it depends. What are you trying to do with the business? Why are business appraisals needed at that time? Will the current market conditions change the valuation of a company compared to a year from now? How does today's business owner figure out what their business is worth? Here's some quick insight into how a business is valued and the process that is used to calculate that value.

Exactly how do you figure out how much is a business worth?

Determining business value is a complex process. It involves looking at the business' individual practices, market share, goodwill in the community and income levels. It can also involve the market and industry conditions, the urgency of a sale, the perceived value of the company's brand and any number of other aspects that are often dismissed as inconsequential to the business value as a whole.

Part of the calculations are based on why the valuation is needed. If you need a valuation of your business because you're considering expanding and want to make sure you're on solid financial footing first, you'll need a completely different valuation than someone who is having to quickly sell a business to settle an estate due to an untimely death or the dissolution of a partnership or marriage.

Another area that can come into play is the current industry and market. If the business is positioned to take advantage of new technologies or innovations in the industry, the business' value to drastically increase beyond what the business owner may otherwise calculate. If, on the other hand, the business is floundering due to industry changes or poor market conditions, using an older business value may leave you open to risk as you overextend your credit trying to keep up with poor economic conditions.

Simply basing your business value on similar businesses that have sold recently may not give you an accurate view of your business' value either. If the business you are comparing to has a more favorable location, better position in the industry, specialties that you have not diversified into, different income levels or other aspects that impact the business' overall value, you may be under- or over-valuing your business' actual worth. 

Is your business a household name or a newcomer to the industry? This can make a big difference in how reactive your business will be to changes in market conditions. What about your reputation? A good reputation will often improve your business value as your customers perceive a higher value to the products and services you provide when compared to a competitor.

As you can see, the question of how much is a business worth is a very complicated one that requires significant experience to accurately answer. Fortunately, as a business owner, you don't need that experience. A business valuations specialist who has experience in your industry and special area of operation spends their days looking at businesses like yours to determine those values using standardized methodologies developed for specific situations.

There are many different ways to conduct 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 how appraisers think about business valuations for industrial companies. 

Pros and Cons of Market-Based Business Valuations

The market-based valuation of a company makes sense for some industries. Consider the owner of a semiconductor manufacturer located in California who wants to sell the company and retire on the profits. If there are other semiconductor companies nearby, then a business appraiser can compare the company that will be sold with others like it, getting an idea of the market share and competitive advantage of the business. This makes sense for large companies over niche companies with a handful of employees. 

The Gross Revenue Multiple Method may work for small industrial companies. In this method, the appraiser takes the transaction price and divides it by the revenue. The appraiser then finds similar companies and determines a multiple of gross revenue, to which the company's revenue is multiplied by to get a business value. This method is simple and quick. However, it is less nuanced than other appraisal methods, and often best for informational purposes. 

Pros and Cons of Asset-Based Business Valuations

The asset-based method can work to determine a fair asking price for the business. An asset approach estimates how much it would the assets would be worth. Subtracting liabilities from assets, the appraiser will come up with a balance. 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 a value-add in an asset based approach. If the engineering company were 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

If the semiconductor company has a stable earnings flow, then EBITDA or earnings before interest, taxes, depreciation, and amortization can portray an accurate business valuation. If the industrial business is experiencing an inconsistent period 0 good or bad - the discounted cash flow method may work well. Here, the business appraiser estimates the future benefits of the company, then converts them to present value to come up with an fair market value. When determining how much is an industrial company worth using discounted cash flow, an appraiser can come up with a stable and fair value for the business even though circumstances are irregular. 

Ultimately, a qualified business appraiser should be able to determine which method makes sense for the given company at a given point in time, correctly calculate a company valuation, and explain the process to key stakeholders. Given what's at stake, it's critical to hire a qualified appraiser who understands the industry.

When your business is focused on providing services your customers need, it can be very difficult to determine what your service company is worth. Part of the confusion surrounding this issue is the value of goodwill and reputation in the market place. When a company's strongest asset is the level of professionalism and technical expertise that is provided, the valuation of a company is strongly rooted in the customer experience and satisfaction in a job well done. But how do you place a dollar figure on a reputation? Here's some of what's involved in business valuations for service companies:

What's the Value of Your Service Company?

When a service company is valued, it has a number of differences than other businesses. Instead of manufacturing products, they provide a service, bringing technical excellence where it's needed most. When a company does that well, they begin to build a reputation for good work and demand for their services grows as customers pass on the company's information to other people. Eventually, the company's name becomes synonymous with good service and fair practices. At that time, the business has begun to grow what is known in valuation circles as goodwill.

As an example, let's look at the business Roto Rooter. Even without knowing much about the business' specific strengths and weaknesses, you probably know that Roto Rooter is a plumbing company and that they can take care of a number of different plumbing issues in your home or business. Because that company has grown and spread so strongly, it had grown its reputation and goodwill to the point that the name provides as much confidence in the quality of the work as the individual plumber who is actually performing it. When that name is used, it's expected that a quality service repair will follow.

But how is that turned into a dollar figure when the valuation of a company is being determined? When goodwill is involved, the company becomes more than simply the sum of its parts or the projection of its income. But it's not just the reputation. It also includes the company's reputation, its branding and brand recognition, the managerial expertise in the business, its past innovations, the trade secrets it has developed, its training processes and the clients and suppliers that are loyal to that company and everything it has developed.

To determine the final value of a business, a qualified appraiser must add the value of the company's assets and equity and then determine how much of the business' value exceeds that figure. The amount that is in excess of the asset and equity is typically considered to be the company's goodwill.

Business appraisals of a service company must take into account the reputation and goodwill of the community and its impact on the business' ability to grow. If you're considering changing direction, selling or passing your business to the next generation, do you know what impact that may have on your business' profitability? By working with a certified business valuation specialist, you can ensure that whatever change you're making can be accomplished with minimal turmoil in the community.

Whether your restaurant isn't doing as well as it used to or if you just want to take it in a new direction and don't know what will work, one way to gain those insights is by having a business appraisal performed. But what kind of information can you discover in the valuation of a company? What's the best way to have a company valuation performed on your restaurant? In this post, we'll discuss the ins and outs of business valuations as they pertain to the eatery industry and how you can use the information you gain to your business' benefit.

Valuing a Restaurant to Determine Your Direction

It could be that your business just isn't doing as well and you don't know why. Maybe you're considering changing to a different cuisine or theme and aren't certain exactly which concept would do best in your area. Perhaps you're getting ready to sell and aren't sure how to market your business' goodwill and reputation in the community. Whatever your situation is, getting a business appraisal is a great way to get a professional opinion about what you can expect in your restaurant.

A business appraisal specialist is trained to look at a variety of aspects in your business. If you've been losing business, is it because of competition or because your business has lost it's newness? A restaurant appraiser knows how to look at your financials to figure out which issue is causing the drain on your business financials. Would a change in theme or cuisine help boost sales or chase away your regular clientele? Instead of simply trying something and finding out later how badly it can impact your business, a business valuation specialist can help you think about specifics ahead of time. 

When it's time to sell your business, what is it really worth to a buyer? If the locals are coming in because it's just the convenient place to go, a buyer may be very interested in purchasing your establishment. But if it's because you've spent years developing the perfect cuisine for the area and a strong reputation in the community, potential buyers may need the reassurance that you'll help with the transition to new ownership. Otherwise they may have concerns about whether the business will remain solvent.

By getting a business appraisal on your restaurant, you'll have access to the best possible insights into what will and won't work to get your business back in shape. If you're not currently working with a certified appraisal specialist for your business appraisals, you could be missing out on the quality insights such an appraisal can bring to your business

It doesn't matter whether it's time to sell, pass the hat to the next generation or just get a better picture of where your business is heading, determining the valuation of a company can be a very complex, confusing process for many business owners. How do you determine the value of a business? The world of business valuations involves several different approaches to help answer that question. Here are the basics to help get you going.

How do You Determine the Value of a Business?

There are several key approaches that are used and methodologies within each one, depending on what your situation is:

• Asset-Based: Though this is often the one most business owners turn to, it's also the least accurate of a healthy business. An asset-based approach uses the value of the business' assets alone. The problem with this type of approach is that it doesn't account for the business' goodwill or its future earnings. For that reason, it's typically only used in liquidation situations, such as bankruptcy. It can include a number of different approaches, but if you ever deal with an appraisal company that is basing the valuation of assets in the company books, you'll want to proceed with caution when selling, especially if you have fully-depreciated equipment or assets that are still in operation in the business. Using a book value approach means that those pieces of equipment are essentially being given away in the process rather than holding their actual value to the business.
• Income-Based: When you sell your business, you're not only selling the assets, you're selling future income. For that reason, income-based business valuation is one of the most popular types of business valuation used in small and medium privately-held businesses that have enjoyed steady market conditions for a period of time. Generally speaking, when a company has had a steady cash flow over the years, it will be appraised using capitalization of earnings approach to reflect that regularity. In contrast, a company that has had irregular income will often be valued using a discounted earnings approach.
• Market-Based: You may want to consider a market-based approach to business valuation. Why? Because when an industry is in a period of rapid growth, past income may not reflect future potential accurately enough. During these times, a market-based approach looks at businesses that have sold recently that have particular similarities to the business being valued. This method can use multiples of discretionary earnings or gross revenue, the sale price of a similar transactions. In the last two methods, the sale price is adjusted for any differences between the companies to come up with the best fair market value for the company being appraised.

So how do you determine the value of a business? By this point, you know that business appraisals are just as flexible as the circumstances that demand them. If you need help determining the valuation of a company, we can help.

If you've been in business for any length of time, there's a good chance that the process of the valuation of a company is something you're at least somewhat familiar with. You also know that business values can change quickly based on market conditions, competitors and industry changes. For this reason, many businesses want the ability to track their company's value over time as conditions change. Though in the past you would have simply get multiple business valuations a particular period of time apart, today's companies often use valuation advisory services to track changes in business value based on changes in the market, the company and similar concerns. Here's some more information on how these services work and how it can help you improve your business' performance.

What are valuation advisory services and how can they help my business?

Valuation advisory services will provide you with a long term look at your business' value and how it shifts and changes in different conditions. In a regular business valuation, you are able to learn the value of your business at that particular time. The business valuation specialist compares your business against other businesses in the industry, as well as other factors that can influence your business' value, then prepares a report using standardized methodologies. That report tells you your business' strengths and weaknesses and where you can make changes to improve your business' value.

But a business can be a very dynamic entity. The market shifts, a major competitor goes out of business, you change the direction of your business - any of these changes can drastically change the value of your business. They can happen at any time and can have a huge impact on your business' bottom line. Even if you've had a business appraisal performed only a few weeks before, the calculated value can rapidly shift into something completely different. How do you keep up with the changes? How can you tell when your business is going in a good direction or when you should shift gears to avoid upcoming problems in the market?

Setting up a valuation advisory service with a well qualified business valuation firm can help give you ongoing insights into shifts in your industry. This allows you to adapt to changes and take advantages of favorable conditions to keep your business ahead of the curve. Do you need to figure out what strategy to take to build your business or weather an industry downturn? Are you considering sorting out an exit strategy and need information on not only what you need to do to improve your sale price but also the best time to sell it? Having the long term information into how your business performs over time can provide you with significant insights that will make it easier to steer your business on a solid course with minimal risks to your investment.

As you can see, when you're considering how business appraisals can quickly change through a variety of conditions, valuation advisory services provide solid long-term benefits to help you grow your business with up to date insights and great opportunities.

Whichever side of the debate you're on, we have a new president in our country, and that will impact the way we do business. But how will President Trump's policies impact valuing intellectual property? Will he support tighter patent enforcement or reduce the value of intellectual property? Though it will be difficult to determine until these changes go into effect, we can take a look at the expected impacts his administration may have on these aspects of the valuation of a company with strong intellectual property assets.

Changes to Patents and How it Impacts Valuing Intellectual Property

When it comes to intellectual property and patents, many companies don't realize the strong impact it can have on the valuation of a company. But part of the impact involves the current administration's effect on how patent law is enforced. How will President Trump's policies impact your business' value?

Though there haven't really been any strong statements from the President on his views of intellectual property, we can take hints from those around him to get an idea of how things may shape up. Here are a few things to consider for how the current administration may go:

• Vice President Pence was on a House of Representatives subcommittee on intellectual property. His positions during that time suggest he would approve of the reversal of many of the patent reforms proposed during the Obama administration.
• Donald Trump Jr. is known for having worked with a company that took action in a patent enforcement campaign, suggesting that he would support strong patent enforcement and pass that viewpoint on to his father.
• One of President Trump's uncle was a MIT professor and inventor who had 23 patents to his name. Seeing that level of success would undoubtedly impact Trump's views of intellectual property.
• As Chief Strategist to the President, Steve Bannon's views will strongly influence President Trump's intellectual property policies, including his push against patent reforms during the Obama administration.
• President Trump's current pick for Secretary of Commerce is Wilbur Ross, who has written in the past about reducing the theft of intellectual property by China. Paired with Trump's focus on raising import tariffs, this could bolster U.S.patent rights.

But what about the man himself? President Trump has risen to his current position through business savvy, branding and the use of trademarks, so it's expected that he'll strongly enforce patent laws. That being said, the conservative backing that put him into office doesn't tend to approve of spurious lawsuits, so there may be backlash against companies that appear to be patent trolls that are viewed as hampering genuine business innovation.

It can be presumed that these influences will create the environment for strong enforcement of intellectual property rights. This improves the value of innovation and intellectual property in a business. By protecting those rights, there is less chance that a business will lose money to a competitor who may have stolen their concepts.

Though these changes may or may not come to pass, having an idea of how valuing intellectual property will change over the next four years can help you anticipate the impacts of the new administration.

When you're trying to get a grasp on the world of business appraisals, one term that is often tossed around is valuation multiples. In general, it involves business valuations based on the value of another business, either by similar size and market share or by income, which is then adjusted for any differences between the two businesses. But what about valuation multiples we hear about in the news for different businesses? What makes these businesses gain or lose value and how can you apply that information and insight into your own business? Here are a few real-world examples, courtesy of Market Realist, of how companies' valuation multiples actually work.

How do Valuation Multiples Work in the Real World?

Fiat Chrysler Automobiles

There are a number of different valuation multiples used in the automotive industry, but one that stands out with Fiat Chrysler is EV-to-EBITDA, or enterprise value to earnings before interest, tax, depreciation and amortization. Recent figures have shown it to be approximately 1.3x, which is half that of Ford's 2.6x and GM's 2.5x. Chrysler's figures are also lower in price to earnings and net profitability. Why? Some of it is related to perceived loss of value in their products, but the main factors include their progress on the company's debt reduction plan, expanding margins consistently and trends in domestic car sales.

Home Depot

Because Home Depot has high earnings visibility, analyzing the price to earnings valuation multiple is one of the easiest ways to look at how this company competes. Even though the housing market is still recovering, the recent slowdown in the economy and uncertainty about changes in the interest rate have lowered the company's multiple from 20.4x prior to announcing its earnings to 18.4x. At the same time, investors are still confident in the company's ability to perform, with even its lowered multiple significantly outperforming competitor Lowe's 15.6x.

McDonald's Restaurants

After McDonald's reported gains in the prior quarter, the company's multiples grew from 18.6x to 18.8x. Though this seems like a small change, it can represent millions of dollars of value that was quickly added to a company that is already mature and does not have as much room for growth as younger competitors. In other words, because McDonald's has already grown through so much of the market, its ability to grow is limited, but their value can still improve based on improved earnings.

Time Warner Media

Time Warner has a price to earnings multiple that is second only to Disney's numbers, and an EV-to-EBITDA multiple that is the highest among the industry giants. But what is their advantage that keeps the company with the high numbers? The company has continued developing original programs, is looking at a new approach to content licensing strategies in overseas markets and has made active gains in promoting its digital platform viewer numbers. These innovations have allowed the industry giant to expand even in a tight market.

As you can see, valuation multiples are a tool used to determine the valuation of a company across many industries and specialties. By knowing how they interact with real work situations, you can get a better grasp of what events will impact your business' overall value.

And of course things change quickly...so by the time you are reading this the company's earnings and possibly the earnings have changed!

When you're working hard keeping your company going on a daily basis, figuring out how to value a small business often falls to the back burner in the chaos of normal operations. But if you don't include business appraisals as part of your regular financial checkup, you may be missing out on valuable insights that can help you expand or improve your business. Here are some details on how business valuations help you make excellent decisions and improve your overall financial outlook.

How to Value a Small Business to Improve Your Financial Outlook

Let's start with the basics. What exactly is a business appraisal? In the most simple terms, a business appraisal looks at your entire business to determine its value. But in practice, it is actually significantly more complex. It's not just a fast look at last year's tax paperwork and a balance sheet. Here are some of the aspects that are taken into consideration during a business valuation:

• What condition is the market in? If the market is undergoing a period of growth, your business value may have increased without having to do anything to make it happen. Similarly, if it's in a downturn, you may be losing value without realizing it.
• Has your business developed goodwill? Many businesses don't take that value into account when trying to determine what their business is worth.
• What other aspects can impact your business' value? If you are located in a prime business area, have a reputation for excellence, have a unique approach to dynamic innovation in your industry or otherwise have extenuating circumstances, your business may not be valued properly without an expert business valuations specialist.

But what else can you learn from a business valuation? You can find out where your business is strong and where it is weak, allowing you to take advantage of your strengths while improving weak areas that could be a liability down the road. You can discover innovative new approaches that businesses in your industry are undertaking to ensure you remain competitive. 

What stage is your business in? Are you still building it and need to know what your assets and equity are worth to grow your business? Are you considering a merger or acquisition of an outside business and need to know where both businesses stand to negotiate a fair offer? Are you getting ready to retire and need to know how to strengthen your business' value on the market to carry you through your golden years? A business appraisal helps you position yourself for a better financial future.

Now that you know a little more about how to value a small business, you can get a better feel to where your business is and where it needs to be improved.

When you're selling a business, you've got a lot of different things to worry about. Is everything operating at its best so that you can get a good price? Are there any areas you need to work on? Is your asking price fair, too high or too low? Will you be able to sell your company as it is and see enough profit to set you up for your future plans? When it all comes down to it, your asking price can make a big difference between a successful sale that sees you into your future opportunities and a failure that sits on the market too long or sells for too low a price. Fortunately, the valuation of a company isn't something you need to worry about in the process. Here's why a business appraisal can help ensure you're asking the right price when you sell your company.

How a Business Appraisal Helps You Fine Tune Your Asking Price When Selling a Business

As you're going through the process of getting your business ready to sell, do you know what aspects of your business are in good shape and which ones will require work before it's acceptable to a prospective purchaser? What will need to go into your asking price to ensure you're getting what your company is worth? These questions are fairly common when a business owner is preparing to sell, and they are often best answered by a professional business appraisal specialist.

A business appraiser will look at a number of areas in your business. Part of that includes the financial paperwork for your company, including financial statements, tax returns and similar information. They may make adjustments to the report to convey more accurate information to the potential purchaser, such as removing significant income or expenses that can cause inaccurate spikes in the financial statements.

Another area that will be explored is the industry. The appraisal specialist will look at similar companies, in terms of discretionary earnings, company transactions, gross revenue or public companies of a similar nature. They'll then adjust the value of those companies based on the differences between the two to help determine your company's value in the marketplace. This allows for adjustment when a market is very new or experiencing strong growth that you want to capitalize on.

By getting a business appraisal before selling a business, you can quickly learn exactly what needs work in your business and can be certain that you're getting at least what it's worth. But don't settle for just any business appraisals company. You'll want one that has experience in your industry and can provide a business valuations specialist who is certified and can provide you with a valuation report based on standardized methodologies.