Business Valuation Blog | Understanding Buying / Selling a Company

The type of small business you own and its operating history will largely dictate how a certified valuation analyst (CVA) will approach appraising your company. The industry-accepted methodologies considered and ultimately relied upon will play a material role in determining its overall value. Here are a couple of examples:

Scenario 1: If your business has been established for several years in a competitive industry and has shown steady revenues with modest levels of annual growth, then it’s likely the CVA can use both income and market-driven approaches to value. The income approach will consider this consistency and create a discounted cash flow analysis utilizing the Capitalization of Earnings Method. This approach will consider your adjusted net income and create a future income stream which can then be brought back to a current date using an appropriate discount rate.

Under this scenario, the appraiser can also consider and rely upon two types of market approaches, one driven by your company’s annual gross revenues and another by your adjusted net income. By applying multiples to these figures derived from similar market comparable transactions for your industry and business type, the CVA will be able to estimate value.

The result will create three different value perspectives, which can be weighted equally or favor one approach over another depending on the reliability of the variables involved.

Scenario 2: If your business is in its infancy with minimal to no historical financial data behind it, or if it is in a somewhat unique market, then it is likely the CVA will only be able to rely on the income approach to value. In this case, they may look for you to provide a reasonable 5-year forecast which can be factored into the analysis while utilizing whatever financial data is available. Startups looking for new investment for working capital are examples of this as well as companies who operate in niche markets where no comparable data is available.

Scenario 3:  Your business has been in existence for a long time but stagnating over the past few years, possibly as a result of the COVID pandemic, or other market factors, with stabilization and future growth becoming highly unlikely. In this instance, the market approach may be the only option as the income of the business has been inconsistent and unreliable.

In summary, it’s always important to take a proactive approach when obtaining a valuation of your small business. Speak with a certified appraisal professional to learn more about what options will work best for you.

You’re a small business owner who has spent years developing and growing your company from a start-up to a fully established operation. Now that you have reached your initial long-term goal of becoming a successful enterprise, you can start thinking about the next chapters.

Are you content to maintain the current profile of the business and hope for consistent revenue with modest growth over the next 5+ years, or potentially capitalize on your expanded knowledge, market share, and client base to take a bigger leap forward that could possibly put the company in the next tier of small businesses?

To put this in perspective using an arbitrary example, let’s say a small landscaping business just surpassed $1,000,000 in gross revenue with a 20% profit margin after doubling these figures compared with 3 years ago. The business hasn’t needed to take on any additional working capital or expand its employee base over this period to realize this initial level of growth.

The business owner may determine two forward paths over the next 5-year plan that will shape the company's future. The first would be to remain content with the fact that they have reached this initial goal and can look to grow 5%+/- per year based on their existing structure and try to trim expenses and improve profit margins by 10-15%.

This scenario would keep the current employees and clients happy and allow for a steady income stream for the owner who might want to retire or sell the business to its employees or a competitor sometime in the next few years.

The second option would be to take an aggressive growth position now that the company is firmly established with a broader goal of doubling or tripling the size of the company over the next 5 years. What might be a reasonable strategy to accomplish this loftier goal?

The first may be to leverage the existing demand and reputation the company has in the existing market areas while realizing that hiring additional employees would enable them to take on the extra work without overtaxing their current staff. This may lead to significantly increased gross revenue but might reduce profit margins given the expanded overhead.

Another strategy might be to research your competition in nearby market locations and attempt to acquire one of these businesses and expand the company’s territory. This effort would require a lot of due diligence to target the right business and might require a working capital loan to purchase the company. The short-term effects may result in lower margins and a greater risk associated with the transaction, however, the potential of creating a more diversified business with immediately impactful growth results will go a long way to increasing the value of the company.

Either path you decide to go down will be an exciting one.

Many of us know how difficult it is when you are going through a divorce, and as a business owner, the stakes are even higher. On top of the anguish and mental toll, a divorce can take on you personally, if you own a company or your soon-to-be ex-spouse owns one, and you need to consider this asset as part of the settlement, the first thing you will need to do is obtain a current valuation. This will provide a professional, unbiased assessment of value for the business so you have one less thing to try and negotiate a fair compromise on.

Your first reaction as a business owner might be reluctance toward opening your financial records to your attorney or your spouse and their attorney. That type of mindset could also bleed over to the appraiser, making it very difficult to properly complete the valuation. Consider taking the high road in this circumstance, which is always recommended when dealing with any type of messy situation that needs to eventually be resolved before the parties can move on.

It's ok to have disagreements on the value of your personal and business assets with other interested parties in any kind of situation, however, the only way to work through them to a reasonable end is through cooperation and full disclosure. Otherwise, the resolution process will take much longer without any guarantee that the outcome will be more favorable to you.

When it comes to working with outside third parties, such as an appraiser, the more information they have that is accurate and well-detailed, the more supportable and accurate the valuation will be. Also, consider the additional benefits of having a third-party valuation of your company completed. For example, you can rely on it as a basis of negotiations for future investment or financing purposes. Or down the road, you may want to sell the business or buy out a partner. It is much easier for a valuation professional to update the appraisal after having recently completed it, which will save you time and money going forward.

Having a long-term perspective when it comes to personal and business decisions usually pays off and provides additional unforeseen benefits down the line. Creating an efficient and effective plan now, even if it pertains to a divorce or other difficult situation, will allow you and the other parties involved to see the “light at the end of the tunnel”. This sense of optimism in the face of conflict will most likely result in the best possible outcome.

A business appraiser can work with you and assist in the valuation process, ultimately providing you with a detailed defendable report that you can work with to help resolve any type of dispute, including divorce. Be proactive in engaging with a certified professional so you have one less thing to worry about as you work through the settlement process.

One of the most exciting and daunting experiences for a business owner is when the time comes to sell the business. After years of hard work, development, and growth, the day eventually arrives when you believe the best option is to cash out and move on to the next chapter of your life.

One of the most essential steps in the selling process is to obtain an independent valuation of your company so you can understand the fair market value of the business as a whole, as well as the underlying tangible assets and goodwill. The appraiser you choose to work with should be certified through the NACVA, ASA, or some other nationally recognized association. Make sure you discuss their credentials before moving forward.

If you own a lot of equipment and real estate as part of your asset base, you should first engage with accredited appraisers who specialize in those areas before completing the full company valuation. Once that’s complete, the business appraiser will include those value estimates as part of their review, along with the rest of their analysis.

Take time to go through your financial documents with the appraiser so they understand the adjustments that should be made to non-recurring and discretionary expenses so you can present the optimal profitability of the company. Two of the key variables in the analysis will be your gross revenue and adjusted net income (EBITDA), along with the potential for future growth, which can be determined based on a reasonable forecast of future revenue over the next 3-5 years.

Since you are selling the business, as an owner, you are expected to settle the liquid assets and liabilities reported on your balance sheet, specifically the cash, short-term receivables, and any outstanding debt. Hopefully, the net outcome for these is positive, so in addition to the value of the business, you can walk away with additional cash to supplement the overall sale price.

The buyer understands that when they purchase the company, they will need to develop their own sources of cash flow, whether that be personal capital, taking out new loans, or developing equity from investors.

Selling your business will likely take a lot of patience and communication to provide all the necessary support documentation to potential buyers, and you may want to engage with a business broker familiar with your industry and markets, who can assist with the overall process. In the end, make sure you are comfortable with all the terms of the deal, and carefully read through the documentation involved. Consider hiring a business attorney to make sure you have all your bases covered and when it is all over, take a deep breath and enjoy what comes next.

If you share ownership or are considering bringing another investor or partner into your small business, you will want to negotiate a fair buyout or buy-in with those involved to avoid a messy dispute. As certified appraisers, we see so many instances where the process has dragged on for months with no agreement due in large part to the fact that the parties on each side of a transaction cannot reasonably agree on a price.

There’s a lot at stake when dealing with the exit or new entry of investors when ownership shares are being allocated, and it is simply human nature that different perspectives on value will come into play. Before you even enter into your first serious conversation about value, you should engage with an independent, unbiased, professional appraiser who can provide a balanced view of the value of the company and the percentage ownership share involved. They will work closely with you to gather the data necessary to understand the financial details of your business and research the specific industry and market in which you operate. You will have an ongoing open line of communication with the valuation expert to point out any nuances and adjustments that need to be considered with your business while providing further insight that isn’t readily apparent from the income statements and balance sheets.

One of the more common areas where disputes arise is whether or not to apply discounts to minority ownership interests. This methodology may be appropriate if the ownership is considered non-controlling, which typically involves a share percentage of less than 50%. These discounts reflect the lack of control a shareholder would have in the operational decision-making of the company as well as a lesser ability to sell their shares in the market to a third party as a result of the minority interest.

It will be important to discuss all these topics during the course of the appraisal analysis with your preferred valuation professional so everyone is on the same page with the underlying factors that will affect the worth of your company and the associated shares.

To avoid wasting a lot of time in the negotiating process and reduce the chances of a serious dispute that ends up becoming a legal battle, advise the parties involved that you will be engaging with a certified appraiser to conduct an independent valuation of the business and the percentage shares involved with the buy-in or buyout. Once the report is delivered, you can share the results and start the settlement discussions from a point of non-contention, which greatly increases the odds of an amicable transaction.

There are many reasons why a business owner should engage in an independent third-party appraisal of their company. They may be looking to sell, refinance, restructure, buy out a partner, or bring in new investors. But what about the importance of simply understanding realistically what your company is worth today by hiring a certified, experienced, unbiased professional to provide you with a complete analysis that you can rely on?

This is what we like to refer to as internal business planning. This broad purpose can cover a lot of areas, but more importantly, it’s a catch-all term that represents the owner’s interest in staying on top of the big-picture perspective of business value today, while providing insights into the shorter-term plans for the future.

It’s always a benefit to understand the real value of any type of asset, whether that’s your home, personal property, equipment, or even your net worth as an individual. If you own a business, the same mindset should be in place. Once a year, take the time to look at your company’s most recent performance in comparison to historic results, and when you have the current financial statements formalized, reach out to an appraiser and have the company value updated.

Once you’ve established a relationship with a professional valuation expert, they can likely provide some form of a discount for continued loyalty and service so the cost component of the work will not outweigh the benefit. As your business plans continue to develop throughout the year, the appraisal you’ve proactively sought out early on will come in handy as you complete your internal requirements. It will also be helpful to third parties who may get involved with your company’s operations.

Value is always going to be a critical component of any business transaction. Don’t get caught wondering or guessing what your business might be worth in the middle of a negotiation or when considering how much additional income you might have to increase employee wages or purchase new equipment.

The reasons to obtain an independently certified appraisal on a regular basis are many, and the more you plan ahead in anticipation of one of those events, the better prepared you will be to handle it effectively and efficiently. Reach out to a valuation professional today to learn more and get the process started.

One of the most challenging components of a professional appraiser’s practice is being an expert witness in a court trial, hearing, deposition, or arbitration. Regardless of how many years of experience an appraiser has, or how many times they have testified, this can be a very difficult process to go through.

Many accredited, professional appraisers rely on business and personal dispute work as part of their overall revenue, and, commonly, a significant percentage of their work involves clients who have hired attorneys to represent them in a litigation matter. The importance of providing an independent, unbiased, opinion of value is critical when business disputes arise, as damage and liability claims need to be reasonably determined. With difficult partner buyouts and divorce cases, there are rare circumstances where a fair division of assets during a separation can be negotiated without the need for a third-party valuation.

Based on my own experience, on average, 35-40% of our engagements involve these kinds of cases. Fortunately, once the initial work has been completed and reports delivered, many of them settle before formal hearings take place. There are, however, those cases that do not, and testimony becomes inevitable.

Since the pandemic, the courts have been trying to catch up with a lot of older casework, while business and personal disputes have accelerated since the recovery. I have testified more in the last 3 years than I have in the 10 years prior, and there is no slowdown in sight.

Fortunately, there have been a few efficiency improvements in the process, the most important of which has been the ability to testify remotely. The additional time and expense involved with traveling has been eliminated in most cases, which benefits all parties involved. The reduced stress that goes along with the travel component of being an expert witness is also a boon to professional appraisers.

Based on my experience, and in discussing this topic with attorneys, I believe the efficiencies involved with remote testimony have not lessened the effectiveness of the process, which leads me to believe this alternative will be around for the foreseeable future.

Regardless, testifying as an expert witness will always be a challenge for valuation experts. There are courses available to appraisers that assist with understanding the process, developing strategies, and gaining key insights to be more effective, however, no matter how many classes you take, or how many times you testify, you will probably always feel like you could have worded something a little differently in a certain part of the testimony. Appraisers should take as much as they can from each experience and strive to become more adept for the next one.

There is a misconception in the valuation industry, which some of our clients express their concern over, that their appraiser needs to be located in close proximity to where their company is situated. It is understandable that a small business owner, who themselves may have several local relationships with their own clientele, would raise this issue; however, the fact is that experienced, certified professional appraisers can effectively value any company, regardless of where it is located, and what local markets it may be operating in.

During the valuation process, a qualified appraiser will work with their clients in a “hands-on” fashion to gather all the specific company information needed to complete an accurate and supportable analysis, and ultimately deliver a full narrative report. Each client has the opportunity to discuss the details of their company that go beyond the black-and-white picture created by their tax returns, income statements, and balance sheets, allowing for reasonable adjustments to be made that paint a more colorful, complete, and truer picture of their business.

The appraiser has access to market and industry data across every region in the country and will take into account the nuances of how the company works within these areas, in relation to their competitors and client base. They will look to understand the specific strengths and weaknesses the business has, as well as their ability to leverage the former and improve on the latter. Future growth plans will be considered regardless of whether they are aggressive, modest, or even negative.

Based on the sum total of the data provided, an educated, trained, professional appraiser considers the same set of consistent approaches and methodologies for every valuation and determines how best to apply and weigh each one specifically to the business. The underlying assets of the company will be taken into account, as well as the specific purpose and effective date of the appraisal.

As you can see, the appraisal process is a collaborative effort that relies upon both the independent valuation professional and the business owner/representative to work together and develop a complete snapshot of the company. By the time the project is over and the report is delivered, it will become clear how well the appraiser understands the business, even though they weren’t local to the area.

It seems not that long ago (although it was!) when running a small business or even working in a larger corporate environment involved a ton of phone calls, writing, typing, and mailing hard copies of letters and documents, while advertising in local trade journals or yellow pages. Over the past couple of decades, advances in technology have allowed companies to operate faster and much more effectively, providing additional opportunities to develop and grow a small business successfully.

Of course, we all know how email, cell phones, and the internet have vastly improved our professional lives, however, you may not be aware of all the tools available that can create even higher efficiencies within your organization.

Have you created a paper-free environment in your business? Yes, hard copy files may still be required for certain companies, but many small businesses can create documents, obtain e-signatures, process payments, and deliver products without ever printing or writing a single word by hand.

Internal accounting functions can all be handled online with the best software products available. Saving and managing files in a cloud-based format can retain them forever with virtually unlimited storage capacities while making them instantly accessible.

An effective website with good search engine optimization (SEO) can virtually eliminate the need to make “cold calls” and have a constant flow of new business opportunities for your products and services. Think about adding an inquiry form for clients to fill out on your site and a centralized voice mail system that all feeds into your email as soon as they reach out to you.

Manufacturing companies have started to integrate artificial intelligence into their production process. This will continue to advance and result in even better-quality goods created at faster rates. Think about how AI can help your small business become smarter and more efficient.

It's no wonder that remote work, especially with service providers, has become the norm, even well after the pandemic. The days of sitting around an office in seemingly endless meetings or wasting valuable time chatting with co-workers around the water cooler are a thing of the past.

It’s all about who can deliver the best product in the least amount of time at the best price. To give your company an optimal chance of becoming one of those who compete in that type of environment, think about taking advantage of the numerous available technological advancements out there. The cost to implement most of these options is not very high, especially in comparison to the potential increase in output and revenue for your small business.

For new business owners, it can take years to finally reach a point where a certain level of success is reached, and all the hard work and long hours finally pay off. Success is measured in different ways and can be fleeting or inconsistent. There are many reasons why success is eventually achieved, the most obvious being dedication, relationship building, and developing a competitive edge that sets your company apart from the rest.

In today’s business climate, there are both new and old concepts to consider when developing a longer-term game plan. The key to longevity is understanding and taking advantage of these areas and building a business model that creates optimal efficiency and effectiveness year after year.

Here are a few to think about:

Website Development and Search Engine Optimization (SEO)

Small businesses no longer need to rely heavily on word of mouth and referrals to grow their business and attract leads. In today’s climate, there are a lot of potential customers who will simply search the web when they need products or services. Even local businesses that have a small regional customer base will benefit from having a great website and SEO model that drives their company toward the top of “Google” searches. It’s the simplest and fastest way for customers to find what they’re looking for so take advantage of it. Consider upgrading your website and its searchability to increase your volume of leads.

Key Employee Retention

You can give yourself as much credit as you deserve in succeeding with your small business, just don’t forget the others who have helped get you there. When you are fortunate enough to have key employees who work as hard as you do and fit into the model that you are building, don’t let them go. Great workers don’t grow on trees and can be just as critical to the company’s growth as you are. Do what it takes to retain them and acknowledge their importance to the business.

Maximize Your Cash Flow

If COVID taught us anything, it’s developing a business that can sustain itself when revenues are down over a steady period. While that experience might be an anomaly, you should consider structuring the financial side of your business so it can remain healthy during slower revenue periods without constraints on making payroll and fixed expenses. Think about stashing some funds away, restructuring your debt, or leveraging some equity you might have in real estate or equipment. Don’t overinvest in long-term projects that might have additional risks associated with them. In other words, manage your money for the long term and you will have a greater chance at continuing success.