Business Valuation Blog | Understanding Buying / Selling a Company

When you're getting ready to wind up your professional life, a common question is "How do I sell my business to maximize my profits?" It's a tough question, with many factors feeding into the final figure you receive for the sale of your business. But by following the steps we've listed below, it's much easier to make sure your company sells for an excellent price and helps secure your financial future, whether for retirement, a new venture or to save for other goals down the road.

How to I make the most profit when I sell my business?

1. Start early. Trying to rush the sale of your business means you're going into the process ill prepared to provide paperwork for potential sellers, you won't know the weak points of your business and you won't be able to negotiate from a point of power because you know exactly how much your business is worth. Take your time to get everything completed before you start the sale process.
2. Get your paperwork in order before getting the valuation of a company. You'll need to get your accounting up to date, gather three to five years of tax returns or financial statements and make sure any other regulatory paperwork has been completed and filed. It's much easier to get everything together at this point instead of trying to find it after you have an interested buyer looking at your company.
3. Get a business appraisal completed early in the process. Because a business appraisal allows you to see your company's overall condition, you can use it to determine where you are strong - great selling points for your buyers - and where you are weak and need improvement.
4. Use the company valuation to strengthen your company's weak areas. Now that you know where the weak areas are in your company, take corrective action. Take care of any issues that could cause problems with your sale and go from there.
5. List your company with a business intermediary, if needed. Your company valuation will give you a strong backing for your asking price.
6. Use your business valuations to negotiate the sale from a point of strength. Once you have a solid buyer and a couple backups lined up, you can negotiate for a higher price because the business valuation backs it up.
7. Close the sale. Your business valuation helps your buyer get the financing they need to quickly close the sale and get you your money from the proceeds.
8. Talk with a finance expert to keep as much of your money as possible. They can advise you about investments, avoiding tax issues and can help you preserve your profits.
9. Spend time helping transition your business over to the new owner. This also helps build your business value to the buyer.

Now that you know how to maximize profits when you decide, "It's time to sell my business," it's time to start taking action. Plan on having a business valuation performed at the earliest opportunity, work through the process and get ready to make a profit off your business. If you still need to set up business appraisals to get your sale process started, why not contact the highly-trained professional appraisers at Business Valuation Specialists. We're happy to help you make the most of your business sale.

When you seek financing to purchase a business, it is natural for the lender to take steps to ensure that the deal is sound. After all, if the business is not financially viable, you will not be able to make financing payments on time. Often, banks require that independent valuation firms perform a business appraisal before the loan closes. Learn what it means to work with a valuation firm before getting a loan to better understand this important part of the business financing process. 

Is a Company Valuation Required for a Bank 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), they will often require an appraisal. SBA loans cannot exceed the appraised value of the business plus any real estate or equipment. Accordingly, if the SBA is lending you $125,000 to buy an auto service business, they will want to make sure that the auto service business is worth a minimum of $125,000.

The SBA has set out their own guidelines regarding business valuations. Other lenders may have similar guidelines for business appraisals prior to financing approval. 

Buyers can get stressed about having a business appraisal done, because the numbers need to match for financing to be approved. In the event that the hair salon appraises at $110,000, the bank may refuse to loan the additional $15,000 needed to meet the purchase price. The buyer could then decide to raise the funds elsewhere, use personal money to make up the difference, or not proceed with the transaction. 

Ultimately, the appraisal protects your interests as a buyer in addition to the bank's interests as a lender. It would not make good financial sense for you to spend $125,000 on a business that only received a valuation of $100,000, would it? It is better to know the appraised value before you buy. 

What Happens During the Business Appraisal Process?

The bank may select their own valuation firm to do the appraisal or have you select a firm. Either way, the next step is for a qualified appraiser -- someone with accredited appraisal training and knowledge of the business niche -- will perform independent research on the business and review business documentation to estimate the valuation of a company. 

The appraiser will select from commonly used business valuation methods, such as the asset approach, income approach, and market approach. 

As a business buyer, there is not much you need to do to support the appraisal process. The business seller will work with the appraiser to furnish the documentation needed to get a business valuation. It is in the seller's interests that the appraisal meet their price too, since they want the deal to close. 

When the business valuation firm concludes their appraisal, they will provide the engaging party with the report. You may also need to get a real estate or equipment appraisal completed as well which are separate reports.

If you are buying a business and are told a valuation is needed, don't worry about it. It's a standard part of the financing process, not something to stress over.

If you are having a company valuation done, then the term EBITDA will come up at some point during the appraisal. EBITDA is one of the many factors that an appraiser looks at when it comes to how to determine the value of a company. Learn what this acronym really means and how it affects your company's value now to better understand the appraisal report. 

What is EBITDA?

EBITDA refers to earnings before interest, taxes, depreciation, and amortization. Appraisers use this term as shorthand to refer to the basic business profitability before these other elements are taken out. Since EBITDA looks at just earnings, it gives appraisers a quick way to tell the financial health of the business during a business valuation. EBITDA does not represent the real cash value of the business, but it can help the appraiser determine what amount of debt the business is carrying and how easily the business can pay this off. 

EBITDA is not the only indicator of your company's value - and, on its own, it is not a very useful figure. Once an appraiser has calculated your company's EBITDA, they account for depreciation and amortization to get a more accurate picture of your business's cash flow. 

Once all these calculations have been made, an appraiser has a representation of your company valuation in terms of multiples of EBITDA. In business appraisals, the appraiser might say that your company has a worth or value of "5 times EBITDA" if your company is worth $5,000,000 and your EBITDA is $1,000,000.

The stronger your financial health, growth estimates, and market dominance, the more attractive it is to potential buyers thus multiples are typically driven higher. For this reason, it can be helpful to get an understanding of your EBITDA if you anticipate selling your business down the road. By making business adjustments that improve your EBITDA, you can improve your company's financial health and command a better selling price when you are ready to sell.  

Considerations for using EBITDA

While you can calculate EBITDA yourself, taking proper adjustments is tricky. A business appraiser knows how to work with EBITDA to account for intangible variables. An appraiser can also make sure that one-time expenses and other items are accounted for properly. For example, acceptable tax practices, like writing off one-time repairs, can actually hurt EBITDA. These are not calculations the average business owner can make on their own. 

Since EBITDA calculations and adjustments can be confusing, it is a good idea to work with a business appraiser to calculate the value of a company. Too often, business owners can incorrectly apply a concept like EBITDA and end up with an incomplete value of the company as a result. In a worst case scenario, this could affect the business sales price by causing an owner to accept a lowball offer or sabotage a deal if the owner thinks the business is worth more than it really is. Proceed with a business deal with confidence by hiring an appraiser to determine EBITDA as part of a business appraisal. 

Whether you're approaching your retirement years or are just plain bored about the direction your business is heading, the sale of a business is something every entrepreneur considers at times. But do you know how to sell your business successfully? We've taken a look at several entrepreneurs and determined what they did right to maximize their business' profit potential during a sale.

How to Sell Your Business the Smart Way

1. Determine why you're selling your business. If you want to sell your business because you're bored or are ready to retire and the economy is in good shape, you're probably okay starting the sale process. But if you're trying to sell because your market is slow or your business is not financially successful, you may want to fix the problem first to ensure the best result. The first question of most buyers is why you're selling your business.
2. Plan the sale ahead of time. And by ahead of time, we mean a year or two ahead of the planned sale. This gives you the opportunity to evaluate why you want to sell the business and take care of any loose ends so that you can maximize your profits. Having an early business appraisal performed helps you determine where your company needs improvement prior to the sale.
3. Get a quality business valuation performed. When a valuation of a company is completed, you have a much better idea of what that company's strengths and weaknesses are and can make adjustments to create a more enticing package. Good business valuations are often a base point from which you can determine an asking price and support your side of the negotiating table. 
4. Decide whether you should or shouldn't use a broker. If you already know who your company will be sold to, such as an employee or family member, you can probably skip paying the broker's fee. But if your company will need to be advertised and listed, a broker can save you time, money and aggravation by taking care of business while you make sure your company is ready to go. 
5. Get your paperwork in order. This doesn't just mean your accounting, though that is a big part of it. Get your past three or four years of taxes together, more if your business has had irregular income over the years. Gather your maintenance and repair logs for your machinery so a prospective client can see that the equipment that comes with the business is in good condition.  If you had a machinery & equipment valuation or other appraisal completed, get them ready to share as well.
6. Find the right buyer. The sale process doesn't stop just because you have one buyer - you'll want to have two to three buyers lined up, preferably pre-qualified for financing. If you're considering offering owner financing on the business purchase, you need to have a lawyer look over the offer and paperwork you're planning on using so you're ready to go.
7. Determine what to do with the profits. Before you spend your profits, take some time to consider what you'd like to achieve financially with it. You'll also want to talk to a financial advisor to make sure you're not hit with any tax penalties later on.

Now that you know how savvy entrepreneurs do it, it's time to follow their footsteps in how to sell your business to make your the sale a success. Take the time to work through the steps and you'll see significant success. If you're looking for a reputable company to perform a quality business valuation, please contact us. We're always happy to help make your business a success.

While there are rules and regulations regarding business appraisals, there is a degree of subjectivity involved in taking a company valuation. Each appraiser reviews the data and puts it together to portray the overall value of a business. To ensure that your business appraisal really reflects the worth of your company, you need to find an appraiser who understands the trends in your industry. Here's how to make sure that you pick the right business valuation consultant for an appraisal.

Review the professional expertise of the individual 

There is a fine line in business appraisals: You want to hire a business valuation specialist who has relevant industry experience, but not at the expense of experience in appraisals. Review the professional experience of any appraiser and ask to see a list or appraisals they have done by industry. When considering a business valuation firm, check what specialties other appraisers in the firm have. Even if you are working with one appraiser from a given firm, he or she may run questions by colleagues. It is in your best interest to make sure that all parties at a consulting firm have the appropriate experience. 

Ask about methodology 

In a worst case scenario, an appraiser could mis-apply a rule of thumb from one industry (such as a law firm) to another (an engineering firm). This could result in a valuation that is over- or under-inflated. When you ask an appraiser about their methodology, listen to what they say and how they say it. An appraiser should be able to explain what methodology they will use and tell you what a particular term means in plain English. If an appraiser cannot articulate how they will appraise your company, do not hire them. 

Check for credentials 

Before you hire an appraiser, it is worth checking to make sure that they have credentials that show expertise. Any appraiser you hire for a business appraisal should have a professional credential from an industry organization such as the National Association of Certified Valuators and Analysts or the American Society of Appraisers. These credentials demonstrate that an appraiser has the proper knowledge to take the valuation of a company, and takes continuing education courses to maintain professional relevancy. If you hire an appraiser who does not have these credentials, then you risk getting a business appraisal that uses incorrect methodology and does not accurately show company value. 

Whether you are seeking an appraisal in the hopes of buying a company or selling a business, establishing a credible fair value is in everyone's best interests. Since a business appraisal can affect the value of your company on the market, and thus the amount you will make in a sale or merger, it is important to spend time selecting the right fit person to perform the appraisal. Time spent interviewing potential candidates, and selecting the right person, results in confidence in their professional credentials and in the ensuing appraisal. This is not a decision to rush through. Since the appraiser should be involved early on, so as to have enough time for decision making, start looking for a qualified business appraiser before offers are on the table. 

To learn more about our services, or to schedule an appraisal, we invite you to contact us.

While mergers are announced with much fanfare, many of these deals fail to live up to their hype. If your business is considering a merger, how can you avoid becoming one of the many merged businesses that do not deliver added value? A simple solution to increase transparency and align the deal for financial success is to seek business valuation services before the merger. Learn how a company valuation can help in this situation. 

Why Seek Company Valuation Services Before a Merger?

A merger can be confusing for all parties. In the uncertain aftermath, decisions may be made hastily that have lasting impact on the success or failure of the merger. 

By seeking a business appraisal in advance, all parties can ensure that the business value is cataloged by an independent third party with industry expertise. A dedicated business appraiser can review the financial documents, assets, liabilities, and full health of the business, and then advise on business strengths. This information helps key stakeholders make more informed decisions on how to proceed after the merger. 

Getting an independent valuation of a company also helps all parties negotiate the financial terms of the deal. A business appraiser will compare the business to companies that are similar in size and nature.  Appraisals can also be completed taking into account some assumed synergies with the other company.

The Dangers of Mergers Without Business Valuations

Without an appraisal, companies might disagree on key terms of the deal or fail to take action that is in line with the best interests of the merged business. Worse, companies could come to regret terms, creating a partnership mired in bitterness. 

There are so many key details to be ironed out during a merger that the day to day running of the business can fall low on the discussion list. Unfortunately, these very processes are the key to getting the business running after a merger and retaining high value customers. Delays here could cause top talent to migrate elsewhere or nervous customers to choose another service provider. 

By uncovering valuable information that can guide negotiations, company valuation services can streamline merger and acquisition talks. When leadership can settle the financial terms of the merger more quickly, they can then move on to discuss other key variables - and plan for success after the merger. 

When it comes to anything as complicated as a merger, it is vital to have key information ahead of time. Since a company valuation appraiser is independent, unbiased, and thoroughly knowledgeable about the unique business industry, he or she is best qualified to uncover and present this important information. 

If you've been wondering about the value of business appraisals, you're not alone. Many business owners consider having a company valuation performed, but back away from committing to business valuations and end up putting their business in a risky situation. As the new tax year is approaching, lets take a look at how getting the valuation of a company helps a business owner make good decisions that directly benefit their company's bottom line.

Navigating the Changes Ahead

Are you getting ready to retire, pass on the torch to the next generation or sell your business? There are a lot of changes that can happen to your business in the next year If you know what's coming up enough to plan for it, you can maximize your tax savings and make the change in leadership a much easier one for all involved. By finding out your company's value of business through a report prepared by a certified business appraiser, you can meet with your financial advisor or accountant with all the information they need, taking the guesswork out of the process and providing legal documentation as to your company's valuation. This in turn allows them to investigate which options will work best for your future plans. This allows you to move ahead with those plans confidently, because you know exactly where your business is heading.

What's it Really Worth?

If you're considering selling your business or making a merger with another company, knowing your business' actual value gives you a point of strength to negotiate from at the bargaining table.

Being a Little Opportunistic

Beyond knowing how to deal with changes in company leadership or determining your business' true value, having a business valuation performed on your company ensures that you know the exact financial picture of your business. This means you can take advantage of investment or business opportunities that come your way very quickly, without exposing your business to risky propositions or bad investments that could leave it crippled in the short term and taking a long road to recovery. A company appraisal performed by a qualified valuation specialist gives you a much better picture of your business' financial health. That means when a new opportunity comes your way, you'll know very quickly whether it's a good prospect for your business or if you should steer clear of the potential risk the prospect could bring.

The advantages you can gain from knowing the value of business concerns are many, but they only apply if you actually have a business valuation completed on your company. To ensure your company appraisal has legal standing, make sure that you have the company appraisal performed by a qualified business valuation specialist who uses standardized methodology to complete your valuation report. If you have any questions or need help setting up a company valuation for your business, please feel free to contact us and chat with one of our highly-trained and qualified business appraisal specialists.