Business Valuation Blog | Understanding Buying / Selling a Company

Appraising an assisted living facility requires a multifaceted approach, as these businesses typically involve both real estate and healthcare components. So, if you're investing, selling, or simply evaluating an operation for internal purposes, understanding the key factors that contribute to its value is essential.

Assisted living facilities generate revenue primarily from resident fees, which can vary based on the level of care, amenities, and location. Analyzing current revenue and profit margins offers insight into the facility's financial health. An appraiser will look for consistent revenue streams, high occupancy rates, and stable expenses in an optimal business situation.

Occupancy rate is a critical metric for understanding value. Facilities with high occupancy rates are more desirable, as this indicates strong demand and operational efficiency. An occupancy rate above 80-85% is generally considered ideal.

From an overhead perspective, assisted living facilities require significant staffing and operational costs, from healthcare providers to housekeeping. Reviewing and analyzing these expenses assists in understanding the facility's operational efficiency. Effective management of these costs without sacrificing quality can boost a facility's profitability and value.

As with many businesses, location heavily influences demand, pricing, and operating costs. Areas with a high population of older adults, access to healthcare, and nearby family-friendly amenities often command higher values for these facilities. Factoring in local competition and demand trends is an important component of the overall appraised value.

Assisted living facilities must comply with various regulations, including health and safety standards. Those with a clean compliance record and high quality-of-care ratings from state or independent agencies often receive higher valuations, as they represent lower regulatory risk.

Assessing future growth through an income approach analysis should be considered and relied upon as well. Facilities with room to expand, offer new services, or that are in growth markets can attract a premium. Renovations or expansions that improve resident experience or add new revenue streams can increase long-term value. Look for a trend of stable and moderate growth to support this.

In summary, valuing an assisted living facility requires a careful balance of quantitative metrics and qualitative insights. Ensure you work with a certified independent professional who can review and analyze these factors to best understand the current worth of your business.

There are several components to consider when valuing a small business. The importance of each will vary depending on the business type, industry, and purpose of the appraisal, but the most frequently used are listed below:

Gross Revenue (Sales) and Net Income (Earnings)

These figures represent the heartbeat of the company and will play a significant part in the estimation of value for the company. Income statements will detail all the revenue and expenses of the business. The appraiser will look at both current and historical financial performance to fully analyze revenue and income.

Cash Flow and Debt Levels

Monthly levels of cash flow are crucial for understanding the company's ability to generate liquid cash to cover debts, reinvest, and support ongoing operations. Cash flow and debt level forecasts can also project future financial health.

Assets and Liabilities (The Balance Sheet)

Tangible Assets: Physical assets such as real estate, machinery, equipment, and inventory.

Intangible Assets: These may include intellectual property, trademarks, brand value, and goodwill.

Liabilities: All outstanding debts and financial obligations, including loans, taxes, and accounts payable.

Market and Industry Conditions

The overall economic environment and specific market or industry conditions and trends can influence the small business value. Typically, the better the market, the better the company will perform within it. Specific multiples of revenue and income will be analyzed and used in the overall calculation of value.

Customer Base and Competition

The number and diversity of customers can impact value. A large, diverse customer base reduces risk, while dependence on a few major customers can be risky. Steady clients and a strong brand reputation can add significant value to the business.

The strength and number of competitors in the industry can influence a business's value. A business with a strong competitive advantage (e.g., unique products, intellectual property, or location) is typically valued higher.

Growth Potential

Under the Income Approach to value, appraisers will assess the future growth potential of the business. Stronger growth potential will usually dictate higher value.

Owner Dependence

If a small business is highly dependent on the owner, its value may be lower than that of a more employee-leveraged company. Future buyers may be cautious depending on how long the owner plans to stay on and facilitate a transfer. Businesses that operate independently of the owner often command higher values.

In summary, these are some of the major variables appraisers review and analyze when estimating the value of a small business. Considering all these together provides a well-rounded view of a business's worth and helps determine its fair market value for potential buyers, investors, or during strategic decision-making periods.

Valuing a construction company involves many factors, including financial, operational, industry, and market considerations. Here is some insight into the key variables that are reviewed and analyzed when an experienced professional completes a business appraisal for this type of operation:

Financial Performance

This includes an in-depth review of historical income statements and balance sheets to determine revenue trends, profitability, cash flow, assets, and liabilities.

Workforce and Management

Understanding a construction company’s skilled labor force and management team is important when valuing the overall business. The appraiser will review owners salaries and overall personnel compensation while making adjustments to normalize the data if necessary to bring it closer to competition in the industry.

Market Position and Relationships

The value of the company will be determined in part by its long-term reputation in the market, as well as vendor and supplier relationships, and its customer base.

Construction Industry and Market Trends

The overall health and landscape of the current markets and industries directly pertaining to the construction business are critical to developing an accurate appraisal.

Capital Equipment and Inventory

Construction companies will have a significant amount of machinery & equipment (M&E) as well as fixed and consumable inventory. Knowing the market value of these tangible assets will be crucial in the context of the overall business. Ask your business appraiser if they have the personnel capable of completing an accredited M&E valuation along with an inventory analysis.

Key Ratios

Debt-to-Equity, Working Capital, and Return on Assets are common ratios to measure within the business. These will assist in determining how leveraged the company is as well as their operational efficiency.

These are just a few of the factors that will be measured when valuing a construction business. Other variables such as legal and regulatory compliance, environmental and safety concerns, and even technology use are others that are important to understand. When your construction company is in need of a current valuation, ensure that you work with an independent, experienced, and credentialed valuation professional to get the job done.

Getting your small business valued is essential, especially if you want to make informed financial and strategic decisions. Here are some key reasons why a business valuation is crucial:

1. Understanding the True Value of Your Business/Internal Planning

   An appraisal helps you understand what your business is actually worth. Many owners have a general idea, but a formal valuation gives you a clear, objective figure based on market trends, financials, and future potential.

   A valuation can also be a benchmark for tracking your business's financial health and growth over time. It can highlight areas that need improvement and allow you to set measurable goals.

2. Selling or Merging a Business

   Knowing your business's value is essential to negotiating a fair deal if you're planning to sell or merge it. It also ensures you're not underselling or overestimating your company when approaching potential buyers or partners.

3. Attracting Investors or Raising Capital

   Investors will want to know your business's current value before committing funds. A certified appraisal helps attract investors and secure better terms in funding rounds or when applying for loans.

4. Exit or Succession Planning/Tax & Estate Issues

   If you plan to retire or want to determine a sound exit strategy, a business valuation helps in planning for the transition. It also assists in setting fair expectations for all parties involved.

   Independent objective appraisals are necessary for estate planning, especially when passing on your business to family members. They ensure compliance with tax laws and help minimize tax liability during inheritance or ownership transfers.

5. Litigation and Legal Matters

   In cases of divorce, shareholder disputes, or business litigation, a formal valuation is often required to resolve the financial aspects. It provides a clear figure for settlements, buyouts, or compensation.

For these reasons and others, it makes good business sense to have your company appraised by an independent valuation professional to ensure you have a true and objective picture of its value in order to make fully informed choices.

It’s fortunate for those in the professional valuation industry that people have different opinions and perspectives on the same topics. Otherwise, there would be a lot less demand for independent appraisal work.

In this utopian fantasy world, certified and accredited valuation reports would still be needed in certain markets, such as accounting, banking, and insurance requirements; however, much of the litigation work that appraisers take on would essentially be eliminated altogether.

Most experienced appraisers rely on a significant portion of their business to come from these types of projects where disputes arise. Lawyers who practice business law, as well as divorce attorneys, who often represent the clients directly in these cases, would also have a difficult time staying relevant.

Many experienced appraisers will work with these clients on dispute work, which will come from a number of different situations. Here are a few examples:

Partner Buyouts

One of the most common types of disputes. What is the value of a partner-owned company, and how should discounts be applied to minority interests? Both of these opinions will vary, and the odds of coming to an easily compromised settlement in a buyout are low.

Liability Damages Claims

One business suing another for a deal that goes “sideways” usually involves a liability case where damages occur as part of a transaction or event. The odds of these cases working out on an amicable basis are even more remote, given the parties involved arguing over not only the extent of the loss but also who is responsible. People generally don’t like to admit or accept blame for anything in business or personally.

Divorce Cases

We’ve all seen the statistics about how many marriages end in divorce. It’s rather sad that this is the reality. However, as an appraiser, you can bet one side or the other will reach out to you when there are company and/or tangible assets involved with the split. Sometimes, the assets are jointly owned, and on other occasions, only one ex-spouse has an equitable interest. Either way, there is a lot of unsettled disagreement when trying to formalize the separation fairly.

All of these situations will ultimately require an independent third party to step in and assist with facilitating a settlement or arguing their case in court. For the qualified appraisers out there, this creates a multitude of opportunities to generate steady sources of revenue and growth.

EBITDA and SDE are the two drivers behind valuing a business under the Direct Market Data Methodology, using a company's profitability and cash flow while factoring in market-based multiples that apply to these figures.

What is EBITDA and SDE?

EBITDA is an acronym for Earnings Before Interest, Taxes, Depreciation, and Amortization, while SDE stands for Sellers Discretionary Earnings.

EBITDA looks at a company's reported net income and adds back the components listed above. SDE adds back variables such as the owner's salary, non-cash and one-time expenses, interest on debt and non-operating expenses.

Other adjustments may be made to these figures based on the particular business and how the owners account for certain expenses and compensation. Under this approach, a market-based multiple is then applied to these calculations to estimate value.

It is uncommon for an appraiser to estimate value using both EBITDA and SDE, so which of these should be relied upon when valuing a business? This is typically determined based on the size of the company and its net income level. The other consideration relates to the involvement of and reliance on the owner to run the operation.

For example, suppose a small business has a net income under $1,000,000 annually and is heavily reliant on the owner's involvement. In that case, SDE should be the measure, given that owner compensation is a major component when adjusting profitability.

On the other hand, with larger companies with net incomes higher than $1,000,000 and the owner's role being less critical to running the business, EBITDA should be the focus. If the owner already has a management team in place, there is no need to rely on the owner's compensation as part of the earnings adjustment.

As a result, EBITDA will typically be less than SDE, and the multiples applied are higher than SDE, given that the prospective new owner will not have to work full-time to run the company successfully.

In summary, once the business appraiser understands the company's structure and net income history, they can make a sound decision about whether to rely on EBITDA or SDE when valuing your business.

When accredited/certified appraisers value businesses, equipment, and personal property, they are taught to consider and ultimately rely on a consistent set of approaches and methodologies, regardless of the industry or type of asset being appraised. This fundamental component of professional valuation principles may be the most important topic to understand in the valuation field. Without this set of guidelines, appraisers could essentially do whatever they wanted in support of reaching their conclusions, which would lead to an unregulated industry that could not be properly governed by the organizations that oversee it.

That being said, the particular types of property being appraised, along with the markets and industries in which they operate, will dictate their own set of variables that will influence value under these fixed approaches and methodologies. Depending on the overall scope of work and available data, they may also lead the appraiser down a certain path of relying on specific approaches over others.

For example, in business valuation, the multiples and risk premiums relied upon under the market and income approaches may vary considerably depending on the specific company and industry involved.

Another example in machinery and equipment appraisal is that the available market data for new and used equipment will dictate how much weight can be placed on the cost and sales comparison approaches. The useful life and effective age of a particular asset will also affect its value.

These distinct variables will influence value within each market and industry; however, the appraiser needs to stay within the lanes of the acceptable approaches they are taught to consider and rely upon.

It’s perfectly acceptable to exclude certain approaches if the data isn’t there to support them or the situation doesn’t call for it. For example, the income approach is rarely used when appraising machinery and equipment, however, it is one of the more common methods when valuing businesses as a whole. This is due in part to the difficulty of tying revenue and expenses directly to the underlying tangible assets of a business.

The premise of value being considered will also factor into the equation. If a company and its underlying assets are being liquidated and are no longer a going concern, then the approaches and methodologies relied upon will be different.

In summary, every valuation project will have its own distinct components within it, however, the appraiser must consider the same set of accepted approaches regardless of the situation.

When potential new clients inquire about our valuation services, we are often asked how much experience we have in a particular industry. The fact is that an appraisal expert cannot focus a significant amount of time on any one industry if they want to maintain steady revenue and grow their business. There are nearly 100 major industries in which companies operate, and appraisers need to apply their skills to any or all of them to create a diverse valuation practice effectively.

Appraisers go where the opportunities take them, regardless of the industry in which their clients operate. Fortunately, if a professional valuation expert has been working for a long time, they have likely completed a certain number of appraisals in several different industries, which increases the odds they have experience in the ones they are being asked about.

Clients need to understand the distinction between industry and valuation expertise. They are two very different functions that will sometimes intersect but primarily demand professionals to focus on one or the other. As an appraiser, I find it fairly simple to develop an aggressive learning curve when working on projects within any of these industries. Combining the market research they conduct for each project and direct client communications will allow them to understand better what they need from an industry perspective to complete an effective valuation.

The standards and methodologies learned and employed by certified and accredited appraisers apply to every industry they work in. All the educational time, effort, and application of these accepted approaches are consistent for any company being valued. The more experience a valuation expert has will further reinforce the understanding that employing these methods in every project they complete will provide greater support and credibility to their analysis and reporting process.

It is important to comprehend the nuances of the industry you are valuing. There are databases and market sources that provide this kind of information at the fingertips of any appraiser who knows where to look. This data will influence the valuation conclusions and is typically based on a considerable number of comparable companies within the same industry.

In the end, regardless of the level of experience an appraiser has in any particular industry, they will be able to provide a credible and dependable valuation of your business if they hold the proper credentials that make them experts in the appraisal industry.

We speak with small business owners daily about their interest in obtaining a valuation, usually for a specific and immediate purpose. The reasons typically involve any of the following:

• The owner is going through a divorce
• A partner wants to buy out their shares, or a new investor wants to buy in
• Refinancing or SBA Loan requirements to obtain working capital
• A potential sale or acquisition of a small business
• Estate Settlement/Transfer or Gift Tax
• Setting up a Trust
• Litigation Support
• Internal Business Planning

The last one listed here is the most interesting because it tells me that a business owner is likely thinking proactively to better prepare themselves for future development plans, ideally in the company's longer-term growth planning stage.

Rather than waiting for something to happen that triggers a more urgent need for an updated small business valuation, it might make sense for owners to have professional appraisers conduct annual valuations of their business so that whatever happens down the road, they will be better prepared to face the challenge.

We often witness an owner's hesitation to move forward with an appraisal once we provide a scope of work summary and fee quote. This may be a matter of cost or unwillingness to commit to the work effort involved. Whatever the reason, it's important to think about the decision not only in terms of the immediate need but also with an eye on the additional benefits an appraisal can provide as you continue to be a successful small business owner.

Partnering with a third-party consultant such as a certified appraiser, tax planner or investment advisor, can give you additional perspective from an "outside-in" view that can help you along the way as the company continues to evolve. I think you'll find that the additional time and investment involved with this type of engagement will be minimal in comparison to the overall benefits of fully understanding the worth and potential of your small business.

Let us know if you would like to discuss these topics further by reaching out to us through our website. We would be happy to speak with you personally.

We have worked with many clients and their attorneys over the years in support of ongoing litigation where the value of a small business and its underlying machinery & equipment is at issue with either a divorce case or an insurance claim. We have seen several situations drag out indefinitely at significant expense to the parties involved, ultimately leading to a court or arbitration hearing. The final judgment is ultimately left in the hands of a judge or arbiter who must pore through a significant amount of testimony and documents before rendering a final opinion that may or may not be favorable to those with a stake in the decision.

In rare instances, innovative ideas have been put forth by the opposing legal teams along with the judges or arbiters to create a more efficient and effective process toward settling on value issues as well as other components in a dispute. If both sides have engaged with independent valuation experts or other outside consultants who have no bias in the matter, they look to utilize them more directly and collaboratively during the pre-trial phase. The idea is for the experts to work together and come to a reasonable agreement on value, which avoids the need to carry these issues into the testimony component of the hearing or trial.

From our experience with this type of process, it has proven to be successful largely as long as the experts respect each other’s backgrounds and opinions while keeping an open mind when negotiating an agreed-upon value for their clients. The only times we have seen this alternative effort falter is when one of the independent consultants digs their heels in with only their specific interests in mind, irrespective of the other expert opinions, ultimately refusing to assist in the process reasonably.

There will always be cases where the parties are so far apart, and there are very high stakes involved that this process may not apply. However, many small business disputes involve disparities that are not that significant.

The big-picture goal of any professional consultant involved with a business or personal dispute is to be part of a team that aims to facilitate a fair settlement that hopefully works out for all parties involved. It’s improper for a professional accredited appraiser to focus their effort solely as an advocate for a particular side of the dispute. If they do, then their independence and unbiased opinions no longer apply. It’s fine if the valuation expert advocates for their work product and the conclusion of value they support. However, those opinions will always have a degree of subjectivity to them. It is incumbent on them to realize that different experts with varying experiences and points of view should be able to find common ground to help all parties involved with litigation dispute work.