Business Valuation Blog | Understanding Buying / Selling a Company

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

How do Valuation Multiples Work in the Real World?

Fiat Chrysler Automobiles

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

Home Depot

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

McDonald's Restaurants

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

Time Warner Media

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

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

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

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

How to Value a Small Business to Improve Your Financial Outlook

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

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

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

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

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

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

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

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

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

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

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

When it comes to the valuation of a company, it can be easy to consider the need for a business valuation expert and the business appraisals they provide to be a one-time thing. But if you do use this approach, you may be missing on some of the best benefits business valuations can offer your business. Could it be that you need to have a business appraisal performed more often or need to learn how to take the best advantage of your opportunities? Here are a few reasons why business valuation experts can help your company soar.

5 reasons why your company needs a business valuation expert

1. Changes in your business' leadership. When you have a change in ownership or leadership in your business, a business appraiser can help you navigate who gets what. When a partner leaves or a divorce happens, a professional business appraisal helps you determine how much that person's share of the business amounts to and how that cost can be handled without breaking the bank. If the individual leaving the business is doing so under a less than friendly situation, the business valuation will hold up to strong scrutiny if a lawsuit becomes necessary to settle the matter.
2. Shifts in the market. Is the market going through a boom or a bust cycle that is affecting your profitability? How can you stay ahead of the shifts to improve your business' overall standing? A business appraiser can help you determine what changes you can make to keep up with those changes and position your business to come out ahead by taking advantage of the situation. 
3. Changes in the industry. Has digitization or other new discoveries or technologies caused disruptions in your industry? When these types of changes are occurring, it can be really difficult to figure out where to position your business. Deciding whether you should embrace the changes or ride out the disruption is easier when you know what's going on overall.
4. Shifts in business focus. Are you considering entering a new sector or changing the direction of your business overall? By knowing what's going on in those areas, you can prepare your business for that shift to ensure that it will go smoothly and that you'll be able to make a successful shift.
5. Changes in your business' profitability. Has your business become less profitable and you need to know where you're losing money? Maybe you have more money coming in than expected and are trying to figure out how to take advantage of it? A business appraiser can tell you what's going on and how to shift your focus to the change.

By keeping these reasons in mind as you go through your daily operations, you can ensure that you can help your business take advantage of any opportunities that arise without having to worry that you're putting your business at unnecessary risk. Working with your business valuation expert means you can safely grow your business while being guided by expert knowledge of your industry, competitors and business. But what if you're not currently working with a well-qualified business valuation specialist? If you need to be connected with a valuation expert who has experience in and a solid grasp of your industry, please feel free to contact us today. We'd be happy to match you up with the right business appraiser for your company.

How much is a manufacturing company worth? It's a tough question, one that has plagued the minds of business owners for centuries. So many factors work into the final calculations that it can be virtually impossible to determine the final valuation of a company. Issues such as the reason for the business appraisals, the amount of time available to sell the company, the company's reputation and goodwill in the community and many other aspects can cause a significant difference between business valuations. Here's a quick look at what's involved and how the final figure is calculated.

How do you determine how much is a manufacturing company worth?

• Why do you need the value determined? Business valuation specialists who have gone through the certification process know which methodologies to apply to your particular situation. If you're getting ready to sell, the appraiser will look at the market conditions and what similar businesses have sold for.
• How quickly do you need to turn over the business' value? If you need to quickly sell your business or raise funds to buy out a partner who is leaving or to settle an estate, you'll need to accept a lower price than you may be able to receive for the business if you had time to prepare it for sale to the perfect buyer at a much higher price.
• What is your business' position in the community? If you have a reputation for excellence, over-the-top customer service or for cutting-edge innovation, your business will have a higher value than one that doesn't meet those standards. It can include your position within your industry or specialty.
• What are the current market conditions in your business' industry? If your market is growing like crazy, there will be a lot more investors interested in purchasing your business, boosting its value significantly over what you might receive when it's in a regular cycle of operation or in a slump.
• Do you specialize in any particular areas that increases your products' perceived value? If you're the only manufacturer of a particular product or use specialized techniques, your products will often have a higher profitability or market share than they would if you're creating the same products as all your competitors.
• How strong is your brand? Brand recognition helps you demand a premium for your products. This is the most basic premise behind why generic sodas cost so much less than household names such as Coca-Cola or Pepsi. When you've worked hard to build up your brand, you can expect a higher return for your products.

When you need to know how much is a manufacturing company worth, having a grasp of how the process works can make a huge difference in understanding the final calculated value. Due to the complex factors involved in calculating the business' final value, it's often better to leave this process to a well-qualified, experienced business appraisal specialist.

When you need to have business valuations performed, valuation firms provide you with significant insights into your company that can give you a wide range of benefits to your business. But what happens when you're working with a valuation firm? What can you expect from a certified business appraisal specialist? Here's a quick look at what you can expect when undergoing a business valuation.

What Happens when Valuation Firms Work with My Business?

To start with, a quality business valuation company will look at much more than just the basics of your business. A business valuation is more than just a hard look at your business' financial health, it's a comprehensive look at the industry and what affects your business' ability to perform in the market. They'll take a solid look at the risks and rewards that are possible with your company and provide you with a detailed report of what your business is worth along with areas in which it is strong and other areas in which it could be improved. Here are the usual steps taken in the process:

1. Once we're in contact with each other, the valuation specialist will gather the basic information about your business. This may include the type of business, the availability of key information, any potential issues and other ares of importance to the business valuation. The purpose of the valuation is also determined, as particular types of appraisals are required in some specific situations.
2. Based on the initial contact, the business valuation specialist will typically provide a proposal including the timeframe expected for the initial business appraisal report and the cost expected. The appraiser will also request any necessary information for the valuation, including financial data, asset information and additional items of interest to the valuation process.
3. Once this information has been obtained, the valuation specialist can begin to dig into the details. They'll take a look at what aspect of the industry your business falls into and what portion of the market share it holds. Beyond simple information gathering, they'll examine your business' finances, including overhead costs, regularity of income, actual value of assets and similar documentation. Your unique facets of the business will also be taken into account.
4. Using this information, the valuation specialist will develop a business valuation report. This report is created using standardized methodologies and is designed to stand up to strong scrutiny, providing you with a report that will hold up in insurance, tax and legal circles. Once the report is prepared, it will be reviewed with you to ensure that it is an accurate reflection of your business and that any missing details are taken into account. If you are not in agreement with the valuation as presented in the initial report and can provide the additional details needed, a revised valuation report is prepared to include those details as appropriate.

To discover the valuation of a company, valuation firms provide invaluable insights into your business. By knowing the process that's involved, you can better prepare for the process and will know what to expect when a business appraisal specialist develops a valuation report for your business.

Whether you want to buy or sell a construction company, you need to know how much the company is truly worth. There are many methods for doing business appraisals, and not all are right for taking the value of a construction firm. Learn which methods to use and which to avoid when figuring out, "how much is a construction company worth?"

Market-Based Approaches to Construction Business Valuations

For an active construction company, a market approach is useful to demonstrate the construction firm's fair market value and position vis-a-vis competitors. An appraiser might use the "Guideline Company Transactions Method," reviewing sales transaction data for other construction firms in similar locations. By comparing the value of these companies on the market, an appraiser can estimate how much the construction company could command in a sale. 

If the construction company is small -- say, a family-owned firm with fewer than 10 employees -- the Multiple of Discretionary Earnings Method is a good choice. When taking the valuation of a company using this method, an appraiser will adjust the company's earnings, then divide the value of transactions by the discretionary earnings. By taking the multiple of the resulting number, a fair market value can be determined. 

An income perspective can be useful to value construction companies of all sizes, and is particularly effective for construction firms that operate from lines of credit, as many general contractors do. With the Discounted Cash Flow method, an appraiser can gauge future revenue five years down the road, then discount this to determine the present value and approximate a fair sale price. 

Capitalization using EBITDA (which stands for earnings before interest, taxes, depreciation, and amortization) can take a single point-in-time value for the company using its cash flow. This method can work for construction companies, but will be most accurate for those construction firms that have a steady cash flow and have demonstrated consistent, steady growth. 

Approaches to Avoid When Taking the Value of a Construction Company 

While construction firms do tend to have a lot of expensive equipment that is valuable, an asset-based approach to the valuation of a company does not factor intangibles. The firm is only as good as its staff members, contacts, and customer base. If a company is sold, will the existing customers and employers be loyal to the new owner? Since hiring and training new employers, or recruiting new customers, would represent a significant challenge to the business value as represented by asset ownership, this method is not a good choice for construction companies.

Especially for construction companies, the intangible, human values for employee skill and employer reputation affect business worth. A reputable business appraiser should be able to select a business valuation method that factors in these intangible assets to reflect the real value of the construction company.

Business appraisers often take a few valuations using different methods, then compare the values they determine to arrive at a fair value of the company that reflects its tangible and intangible assets, liabilities, income, and position in the market. Any appraiser taking the valuation of a company should be able to clearly explain which methods they used, why they used them, and what the data means, then answer any questions you have have before you proceed with the purchase or sale of a construction company. 

When you're working on an exit strategy for your business, you've got a lot of different options to consider. But one area where you can discover real value is through a business valuation for exit planning purposes. By determining the valuation of a company, you can figure out exactly where you need to improve your business before putting it up for sale or passing it on to the next generation. Here are some details on how you can use business appraisals to plan a comprehensive exit strategy.

How to Use a Business Valuation for Exit Planning Purposes

A business valuation is a financial document that provides solid evidence of your business' value. It can provide significant insights you may not have considered into your position in the market, your daily operations, your balance sheet and a number of other aspects. By having this information in hand prior to completing exit planning, you can determine whether it is worthwhile to make particular improvements to your business to maximize profits from the sale of your business.

One of the first areas of scrutiny that many prospective buyers will look at will be your business' financial statements. But what if you've had the occasional irregular income or expense? A qualified business valuation specialist is able to put your paperwork through adjustments in a process known as normalizing.This provides prospective buyers with a much more accurate view of your business' financial picture. Beyond the financial statements, a good business valuation specialist can provide advice on whether you should pay down particular debts, get legal documentation in order or reduce overhead expenses. This can make your business more flexible as it goes into the exit process.

But what about your assets otherwise? If your accountant uses a standardized depreciation table for tax purposes, they're using a completely legal way to depreciate your assets. But if those assets are still in use by your business and have been completely depreciated, they still have value that is not being counted as assets. If you have assets that are being used hard and must be replaced before they are completely depreciated, you may still have them recorded as assets even though they have no value. A good business valuation specialist can help make sure your balance sheet reflects accurate values by recommending things such as an equipment appraisal.

But what about outside influences that can affect your business' appraised value? An experienced business appraiser may have a better feel for where the market is going and whether it is a good time to sell or if you should plan on waiting out a slump in the market to get the best possible value for your business. Do you have a new competitor in the region or in your particular specialty? A good business valuation specialist may be able to give you advice on how to further specialize or develop your unique selling point to make your business more attractive to a prospective buyer. 

By getting a business valuation for exit planning purposes, you can create a comprehensive exit strategy that provides you the opportunity to get the most from your business. If you're not currently working with a certified business valuations specialist who has experienced in your industry, please feel free to contact us today. We'd be happy to connect you with one of our experienced business appraisal specialists.

When it comes to valuation of a company, there can be little doubt that there are many different factors that come into play when determining the final value. But many businesses have different aspects that can drive the business valuations in different directions. One may have more focus on assets, while another has a strong value in branding and goodwill. One area of interest to those in manufacturing and fabrication is the calculations that go into valuing a fabrication company. Here are some details to get you started.

What drives the final figure when valuing a fabrication company?

There are a few basic factors that come into any company's balance sheet, including assets, liabilities and equity. But when your company does fabrication, it can be a little confusing knowing what emphasis to put on which factors. You could focus on assets, but that's not what makes your business unique. Assets include the value of your machinery, which can be expensive, but it's not the best route to take in determining value. After all, when you've spent years building your business, you want more from it than the sum of its parts, right?

Income is a common factor used in valuing fabrication companies, especially those that have made a name for themselves over the years. Income reflects customer loyalty, repeat business and stability. For that reason, many fabrication businesses will use an income-based approach to ensure they're getting something back from the projected future income of the business. This can take a couple approaches, however.

The third factor used in fabrication company valuation is market based. The market approach looks at comparable sales in the industry.  If it is a hot market, your fabrication business will have comps that are selling at higher multiples.  If it is week, you will see lower multiples.

As you can see, valuing a fabrication company can be a complex process involving many different aspects of your company. However, when it comes to business appraisals, the information and insights you gain into your company, your competitors and your industry can help you create real growth in your fabrication business. When it's time to have a business valuation completed on your fabrication company, make sure you work with a certified business valuation specialist who has experience valuing manufacturing and fabrication companies.

When you work in an oilfield services company, there are a lot of challenges just on the job site. Long hours, roughnecks that may or may not work out on the job, worker's comp claims, sudden market shift that turn last week's profits into this week's deficit - we've all been there and seen that. Some of those challenges have a stronger bearing on your company's valuation than others. Here's a look at what issues may come to the front during business appraisals of an oilfield services business.

Issues involved in valuing an oilfield services company

There are a few different areas where the oilfield business is affected by different issues than other businesses may be concerned with. Most oilfield sites, whether dry and dusty or damp and boggy can be very hard on machinery. Combine that with the not so gentle treatment it receives at the hand of your average roughneck, and your equipment will quite possibly not last as long as your accountant thinks it should. Even equipment of good quality that is serviced regularly may still not last as long as you'd expect it to. This can cause some serious issues with the asset column of your balance sheet.

The second has to do with the market. There's a well fire in Saudi Arabia and prices shoot sky high, rendering that old plant profitable again. A new geological discovery announces the biggest find since Bakken Shale and the prices plummet with the expected new supply of oil. As the industry goes into a boom or a bust, the business' profitability may profit or suffer based on the changes and how they affect that business.

Because the average gas and oil company may go back and forth from making a profit to sitting in the red as the market shifts, it can be very hard to get a solid answer as to the value of your business. 

The final factor we'll consider in this piece is the effect the M&A market can have on your selling price. If the market is booming and everyone wants to invest in oil, you may find that your business will sell for several times what you think it may be worth. If, on the other hand, the market is in a bust cycle, there may be a large number of oilfield businesses that are available for sale as desperate investors try to sell before the bust hits the bottom. This can artificially depress the price you may be able to get for your business.

When you've spent years putting blood, sweat and tears into your business, you want to make sure you're getting what it's worth. The issues faced when your business is an oilfield services company can be many and complex, but getting a quality valuation for your company doesn't need to be.