Business Valuation Blog | Understanding Buying / Selling a Company

Our world has two things you can always count on: death and taxes.  Unfortunately, many people are unwilling to discuss end of life planning, whether it's those who are faced with health problems and their own mortality or those who will be left behind who do not want to discuss the loss of a loved one. But failing to put a plan in place to deal with this eventuality can leave your business open to serious problems, including insolvency from death taxes. When it comes to estate planning and taxes, it's vital that you take the time to determine the value of a business before the time of need so that you can plan for financial methods that will ensure the continuity of your business. 

Death and Taxes: Preserving Your Business Through Estate Planning and Taxes

What exactly does the valuation of a company have to do with estate planning and the taxes that are incurred when a business is passed to the next generation? Quite a lot, as it happens. Business valuations provide a legal basis for the value of a company, allowing taxes to be charged based on the company's actual value instead of an incorrect estimate based on tax accounting. It also helps you determine areas where your company is strong and where it is weak, allowing you to get it into shape before worrying about passing on your legacy. By getting a valuation from business appraisal specialists, you can ensure that you have some financial means in place to deal with taxes that will fall into play at the time of death. Here's' a little more on each of these areas:

• Legal basis: By having a company valuation performed by a certified business valuation specialist, you can ensure that your company's value will hold up in court. A certified business valuator has gone through a vigorous training process to ensure they're using the proper methodology to value your company. Because the national accreditation organizations have certified these methodologies, the business appraisals that are calculated using these methods hold legal weight.
• Strengths vs. weaknesses: A business appraisal looks at all aspects of your business and can help you determine where it is strong and where it needs work. Because the first few years of independent operation can be somewhat rocky for new business owners or even for those who have experience in the company but are taking the reins for the first time, having your company operating in a position of strength at the time of transfer can help ensure your company remains solvent and your legacy remains intact.
• Estate Planning: Part of estate planning means planning beyond the death of the current business owner. In its most basic, estate planning should include contingencies for taxes that will come into effect at the time of death, when a business passes to your heir. What legal challenges will they face? Have you outlined who you're leaving your business to? What about taxes that will come into effect? A good business valuation allows you to work with an accountant to estimate the amount of death taxes and set up contingencies to ensure those taxes can be paid.

Though estate planning and taxes are a delicate subject, it's important that you look at having a quality company valuation performed to ensure that your legacy will live on after your passing. If you haven't had a chance to have a quality business valuation performed, please feel free to contact our valuation specialists to ensure you have the information you need to properly plan your estate.

One of the biggest questions when an owner realizes they need to discover the valuation of their company is what is business valuation? Because it can seem a confusing set of terms and processes, business valuations are one of the least understood tools available to a business owner or executive. We'll explore what business valuations are, why they are important to your business and what to look for in a good valuation firm.

What is Business Valuation?

In its simplest format, business valuation is the process that determines the value of a company. It's the same as an appraisal. But beyond the most basic concept, business valuation, when done correctly, can tell you any number of things about your business and whether particular actions are a good idea at this time or if they should be put off until some issues are resolved. 

Business valuation is used in sale or merger negotiations, to argue taxes with more accurate values, to obtain financing for an expansion or new direction for a company or as legal proof of value in court cases. These reasons aren't unique to the United States. Business valuation also takes place in other countries around the world for most of the same reasons.

Why is Business Valuation Important?

Business appraisals are important because they help you make good decisions for the future of your company. If you're considering selling your business, do you know what it's worth? Is the new market you're considering entering a good risk for your company at this time? Where is your company weak and needs improvement? All these questions can be answered with a quality business valuation.

Business valuations also help prove your company's value to other entities. If you have had a loss because of a fire or natural disaster, a business valuation shows what has been lost in terms of assets, potential sales, goodwill and similar concepts. If you have to get financing, it proves the value of based on a level of anticipated cash flow. It can stand up in a court of law, but only if it's done correctly.

What Should I Look for in a Qualified Business Appraisal Company?

Fly-by-night appraisal companies don't really provide any serious value. They show up, create a report and when they have a few complaints because their reports won't hold up to scrutiny, they disappear again. Obviously, that isn't what you need when you're spending good money to have a company valuation performed.

A qualified company valuation firm can provide references, is available for discussions by phone, and uses standardized methodologies to generate the business appraisal report. Their appraisers are certified by one of four accreditation organizations: the American Society of Appraisers, the American Institute of Certified Public Accountants, the National Association of Business Certified Valuation Analysts or the Institute of Business Appraisers. Because the appraisers have been through significant training to receive these certifications, they follow recognized methodology when preparing their reports, which will hold up well to scrutiny.

Now that you have a better idea of what business appraisals are, how they can help you with making wise business decisions and what a good valuation firm looks like, it's time to take action.

Do you know how to determine the value of a business? Most business owners don't, and it opens up their business to unnecessary risk and causes them to leave money on the table during negotiations. The valuation of a company is a valuable tool that tells you where your business is strong and where it is weak. Business appraisals help tell you when you can take advantage of an opportunity without risking everything. Here are the different options to keep in mind when getting a company valuation.

Different Options for How to Determine the Value of a Business

So what are the different options available for how to determine the value of a business? It depends on your purpose. If you're just trying to get a ballpark figure, comparing your casual restaurant to the recent sale price of a similar business in your area, it might give you a general idea. You could also speak to someone that sold their business to try to get an idea of what your business is worth. But if you plan on using your company appraisal for any serious business purpose, you'll need to have the valuation of a company determined by a qualified, certified business appraiser.

Why are the first few options not as solid? If you're comparing to a neighboring business, you may not be taking into account important details. Though the businesses may seem very similar, you don't want to leave money on the negotiating table, especially if the owner was desperate to just get out of the business and didn't get nearly what the business was worth. In the second option, business owners may want you to think that they sold their business for more than what they really did.  Others may not truly understand earnings and multiples and give you misunderstood information. 

Why it's Important to Use a Qualified Business Valuation Company

The third type of business appraisal uses a qualified valuation firm. Why? Because a certified business appraiser knows how to put together a business valuation report that will stand up to strong scrutiny. The process of certifying as a business appraiser and building a reputation as a quality business valuation company takes time and effort. A certified business valuation specialist backs up their calculations with facts because they use a standardized methodology that follows the national accredited standards.

For this reason, the reports they produce will hold in court. They give you a position of strength to negotiate from when you're negotiating a business sale or merger, which ensures you get to walk away with everything your business is really worth. They provide proof of value, whether it's for an insurance claim from a significant loss, fighting a property tax assessment that is just not realistic or to secure financing for a new opportunity you're pursuing. They also provide you with information on the strengths and weaknesses of your company, allowing you to build it up into the kind of enterprise it can become.

Now that you know different business appraisal options and where to get proper business valuations performed, it's time to take action. If you're not currently working with a business valuation firm, please contact us. Our certified business valuation specialists are ready to help you discover the true value of your company to help you make it stronger.

If there's anything that's certain in business, it's that dealing with the government is probably going to take longer and be more complicated than you'd like. But there are also a variety of agencies that help the little guy out, including the Small Business Administration (SBA). One of the most popular programs the SBA offers is its SBA loan guarantee program. Rather than being a direct loan, it provides a guarantee that the loan will be paid back to the lender if the business fails. But for some of the loan programs, the SBA requires a business valuation performed. Here's why.

How can a business valuation help secure an SBA loan guarantee?

• A business valuation performed by a certified business valuations specialist ensures that the valuation has been performed to a certain standard and using accepted methodologies. This means that it's an accurate picture of your company's financial state and shows the SBA that the loan they're guaranteeing is being put into a company with solid assets and a good chance of paying back the loan.
• Many business owners make the mistake of basing their company's worth on their tax accounting records. Though these documents are accurate for their purposes, they don't always reflect the accuracy that business appraisals offer. As an example, if a piece of equipment is purchased in a tax year, it's often depreciated over a particular period of time set by the government's depreciation table. Does that mean that the equipment has no value once it's been fully depreciated? No. If you base your application on those records it may reflect a much lower level of assets than actually exists in the company.
• Having a company appraisal performed also ensures that you know what kind of condition your company is in. There won't be any nasty surprises when you go to pay back the loan and realize there's a serious issue in your cash flow situation, industry outlook, expected income or similar concerns. You'll know where your company is strong and where it needs some improvement. A business appraisal gives you a solid look at how your company is performing well and where you need to invest some time and effort.
• In what circumstances are business valuations needed for a loan guarantee? For most cases when special use property is not involved, the SBA guidelines allow a lender to perform their own company valuation if the amount being financed minus the appraised value of real estate and/or equipment being financed is $250,000 or less but requires an independent certified company valuation if the loan is for over that amount. Also, close relationships between buyers and sellers trigger the need for a valuation.  But you may want to have a business valuation performed independently if you feel the bank doesn't have a solid grasp of your business or industry, as the appraisal process is collaborative to a certain extent, allowing you to request a re-evaluation of some aspects of the valuation.

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. The valuation of a company can help you determine where your company is strong and where it needs work. If you need to have a company valuation performed, either for an SBA loan guarantee or for your own purposes, our certified business valuation specialists are ready to help.

When you're looking at buying a business, there are a million things to consider during the process. What are you going to keep the same? What changes are you going to make to improve the business? What upgrades are needed? But before you sign on that dotted line, you need to have a solid business appraisal done to help you determine the valuation of a company. Why? We're glad you asked.

Why a Company Valuation Is Important When Buying a Business

• What is the business really worth? Though the seller may be asking the same as a similar business in a neighboring town, the business they're selling may have a poor location, a less than stellar reputation or other reason why they're asking too much for it. By having a business appraisal performed on a business you're considering buying, you have a solid point from which to negotiate a better price.
• Are there any potential problems that you're unaware of with the business? Is the industry expected to improve or decline? A qualified business valuation specialist will help find these potential problems so you don't end up with a nasty surprise.
• Is the seller asking too high a price because of emotional attachment? Sellers who haven't had a good business valuation completed tend to fall in one of two areas - a fair price (or good deal from a buyer's perspective) or an inflated price. You won't know which is which until you have a good company appraisal performed to determine the accuracy of the figures.
• What's the business' projected income for a new owner? Financials are often hard to understand because owners sometimes pay themselves more or less than a fair wage.  A business valuation will help a new owner get an answer to this question by calculating the Seller's Discretionary Earnings.

By having quality business appraisals performed before buying a business, you can rest assured that you're getting what you've paid for and that you're making a great investment in your future. If you haven't had a chance to get a quality business valuation from a certified appraiser, please contact us today. Our experienced business valuations specialists work with small businesses, making them a great choice to discover exactly what is happening with the business you're buying.

Transferring ownership of the family business requires care and planning to ensure a smooth change of leadership. One frequently overlooked tool that can make transitioning business to family members smoother is a company valuation. Learn how getting the family business appraised first can benefit not only the business itself but all relatives who work for the family company. 

Why You Should Take the Valuation of a Company Before Transferring Leadership

Imagine if you transferred the family business without getting a company valuation. Older relatives who held leadership positions might be expecting a large payout. Some may have assumed the payout was certain and planned their retirement lifestyle on it. When the valuation of the company is not fixed when leadership transfers, the grounds might be set for an intergenerational squabble if the new leaders do not feel the company has enough money to support these retirement payouts. 

If you instead seek a business appraisal first, a neutral third party would issue a value for the company that could act as a guide for all relatives. While the appraised value might fall short of the perceived value, the process of getting the business appraised can take some of the emotions out of the leadership transfer.

Once you know the valuation of the company, you can then gauge how much you can expect to inherit if you sell to the younger generation. Dividing the fair market value by the number of shareholders will give all owners an idea of the retirement income they can expect, and can help everyone plan for the next steps with accurate and timely information. 

The appraisal can also help manage expectations and allow the new leaders to chart a course forward with confidence 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 does it make sense to have the company appraised from a personal perspective, it is necessary to do so for tax purposes. The IRS requires that businesses that are 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 helps immensely. 

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 only way to avoid this and keep all business assets with the company. 

Planning Your Business Appraisal 

Now that you understand why a business appraisal is needed before transferring family business ownership, take action by finding an appraiser near you who understands your industry. Just like other professionals, appraisers have niches they work in. It is well worth the time spent to find an appraiser who understands your industry and your geographic locations, since these two variables can directly affect the company's appraised value. 

Business Valuation Specialists can help you find the right person to perform the company valuation, so you can move ahead with confidence.

When you're selling a business to a third party, the topic of business valuations may arise. But why is a business appraisal important when you're selling your company, and what difference will it make at the end of the day? As it turns out, the valuation of a company is one of the key documents that several parts of the process revolve around. Here's why:

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

When you're selling a business to someone you don't know, you want to make sure you can get everything you have coming out of the business into which you've put so much of yourself. A quality business valuation is the first step to ensuring that happens. By having a company appraisal performed, you can see any areas where your business needs improvement, whether it's getting a few pieces of machinery repaired or improving your facilities to make them more welcoming to customers. At the same time, you'll learn where your business is already strong so that you don't have to put further effort into areas that are already in excellent shape. Once you've made the changes and improvements, your business should have increased in value, allowing you to see more benefit from your actions.

The next step is to list your business for sale and entertain offers. If you're like many business owners, you know that your business should be worth more than the assets on the balance sheet, but probably don't know what that figure actually works out to be. By having a business appraisal in hand, you have a much better idea of what that figure should be, and so you can consider offers that are reasonable while dismissing those which are not. You can also decide between appraisal methods, whether 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 and request that the appraisal reflect future income from your current business.

But don't feel that you need to snap up the first offer that comes along that is within your acceptable price range. If there is still a significant difference between the offer and the appraised value of your company, having a company appraisal helps you at the negotiating table. Because a company appraisal is based on a standardized methodology, it represents the very best of appraisal practices and procedures, even holding weight in legal, insurance and financial circles. If you want the other party to come up in price, providing them with a copy of a certified business appraisal report may make them aware of facts and circumstances about your business they may have previously been in ignorance of. This then gives them a chance 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.

When you're in business, you know that a business valuation can be a great tool for improving your company. But under what circumstances should you get an updated business valuation? Here are ten of the most common reasons to get a business appraisal.

10 reasons for getting a business valuation

1. Transitioning business to family members: Passing your business to the next generation is a great way to maintain a legacy, but you still need to get a fair price for your equity. A business valuation assures that you have documentation of the company's value.
2. Selling a business to a third party: When you're selling your business to an outside party, you want to ensure you get what it's worth. Having a quality business appraisal helps ensure you're not leaving money on the negotiating table.
3. Buying out an exiting shareholder: When one shareholder wants to leave a business, you want to control those shares in some situations. By knowing what those shares are worth, you know what a fair offer would be instead of worrying about overpaying or stripping the business of vital capital.
4. Adding additional shareholders: Have you ever had someone ask about buying into your company but you don't know what the shares are really worth? A business appraisal helps you know your business' true value.
5. Estate planning and taxes: If there are only two constants in our world, it's death and taxes. In the case of estate planning, knowing what your business is worth allows you to plan for the inevitable taxes that are to come, so that you can ensure your legacy lives on.
6. Key person insurance: What would happen if your partner or other vital part of your business passed away or was disabled and unable to work?  A business valuation helps prove what their contributions to your business actually are.
7. SBA loan guarantee: When you need to get an SBA loan, you'll need to document what your business is actually worth.
8. Strategic planning: A depreciation schedule may not show the true value of your assets, and if your balance sheet hasn't been adjusted for a variety of possible changes, you may be taking a larger risk than you'd intended. An up to date business valuation helps you make better business decisions with good information.
9. Buying a business: When you're considering buying a business, you want to make sure there are no unpleasant surprises waiting in the books or the market. Because a quality business valuation looks at potential income, market conditions and similar concerns, you can rest assured that you're making a good investment.
10. Litigation: Nobody likes being sued, plain and simple. When you're going through litigation, whether it's a divorce, injury case or any other type of court case, you want to be sure you can prove the value of your business, so that any damages can be based on what your company is actually worth instead of inflated figures from a lawyer's estimate.

As you can see, there are many common reasons business owners have a business appraised. If you haven't had your company valuation performed recently, what's stopping you? Knowing the valuation of a company is a valuable tool.

As a business owner, it's easy to assume that the valuation of a company is based solely on the balance sheet or the sum of your assets instead of taking into consideration market conditions and future income. When this happens during a negotiation, it can dramatically impact how much you get out of the deal. Before you assume you know the answer to the question, "What is my business worth", take a look at what company valuation specialists look at when performing business appraisals.

What is my business worth? The answer may surprise you

Asset-Based Approach

An asset-based calculation of business value is one of the most commonly used methods by business owners, but it's also the least accurate. Many business owners will look at the depreciated value of their assets on a balance sheet as compared to their liabilities and think their business is worth the difference. Unfortunately, many businesses depreciate their capital equipment based on a standardized rate schedule developed by the IRS instead of basing the value on what the equipment is actually worth. This can create a significant difference between what a business is worth on paper versus in reality.  First, appraisals should be completed on the assets for the analysis to be accurate.  Second, if the business is profitable, more likely than not the business has created goodwill and this method does not take it into account.

Income-Based Approach

By comparison, a business appraiser will look at one of two other approaches long before they look at an asset-based approach. The first of these is an income-based approach, which calculates the value of a business based on prospective future earnings. The business value is based on a projection of income for a certain time period, which is then discounted for a business value. When a company demonstrates that it has regular growth and cash flow, the appraiser will use a capitalization of earnings method to project potential income into the future. If the company has had irregular cash flow and periods of boom and bust cycles, a discounted earnings method is used to project the income into the future, providing a current price for the expected future benefits.

Market-Based Approach

The other approach that a business appraiser may choose to take, based on the circumstances, is to look at what similar companies are selling for to determine a fair value for a business. This can be based on information available for transactions that occurred for similar businesses. For example, discretionary earnings is calculated by adjusting financial statements to calculate an adjusted EBITDA which includes the owner's compensation, which is then calculated with a multiple to determine value. Other methods look at a percentage of the company's revenue.  Statistics is used to develop multiples and percentages and they are applied to the subject business.

Now that you have a better idea of what a business appraisal specialist sees when performing  valuations, what answer do you want to the question, "What is my business worth?" By having a quality company appraisal performed by a certified business valuation specialist, you can ensure that when you leave the negotiating table, you've done everything you can to ensure you get what your business is really worth.

You may know that getting the value of a business is important before you sell the business. But did you know that taking a step back and getting the value of the business taken while you are still formulating your exit strategy can help you earn more when you go to sell? Learn why we recommend having a company valuation done in advance of a business sale. 

How a Business Appraisal Can Help in a Sale 

During an appraisal, the business appraiser will typically review the cash flow of your business along with the market value for businesses like yours. It can be very helpful to see how you "stack up" to your biggest competitors and learn what a typical buyer might be willing to pay for your small business. This information can also help you make the right moves before you officially announce the sale. 

When you know the value of your business vis a vis competitors, as well as your cash flows, you can look at things from a buyer's perspective. Those improvements you have been putting off making while you work on your exit strategy? If you make them before you go to sell the business, and they increase your market position relative to competitors, suddenly they may seem like a bigger priority. 

If the appraiser's valuation suggests that market demand in your niche will fluctuate, it may make sense to postpone your exit or to speed it up and sell while the market demand is high. For example, software as a service is a hot niche right now. If you want to sell a software as a service company, now would be a good time. 

If your niche were low in demand right now, you could certainly plan to sell the business but might not be able to earn what you anticipated when you originally dreamt of selling. Knowing that demand is lower than hoped for, you could then determine whether business improvements could help you raise the company valuation or whether you would spend more on making business improvements than you could earn back in a sale. 

An appraiser will bring outside perspective and nuance to the business valuations process that you, as the owner, are simply unable to have. The valuation you receive in the appraisal process can help you better evaluate unexpected things that tend to arise during the sales process. 

If you are willing to continue working for a few years and you can take actionable steps to improve your business cash flow and reduce liabilities, using the appraisal report as a guide, you can increase the business cash flow and your chance of a profitable sale. 

When it comes to small business appraisals, it is vital that you select a business valuation firm that is familar with your industry, employs accredited business appraisal professionals, and is trustworthy. After all, when you are basing business improvements on the recommendations of the appraisal, you need to feel trust and confidence that you are doing the right thing. 

If you are working on your exit strategy and would like a business valuation to prepare you for the process of selling your small business, Business Valuation Specialists is here to help. Contact us to learn more about small business appraisals or to find out the value of your company.