Business Valuation Blog | Understanding Buying / Selling a Company

When your business is thriving, it's easy to get caught up in the rapid pace of a successful business. But we've all seen situations where a very successful business suddenly failed because the managers and executives didn't know valuing a growing business was important to stave off problems that would show up down the road. How does the valuation of a company help your growing business remain successful? Here's a quick look at how business appraisals can be used to develop dynamic insights that assist comprehensive business planning.

Changing Values: How Valuing a Growing Business Helps Monitor Growth

A company valuation provides insight into your business' growth through a few different mechanisms. These mechanisms look at your business' internal values, comparisons to similar businesses and across the industry as a whole. Here's what the appraiser is looking at:

The Business Itself

Your business is unique in its own way. It has different practices than other businesses. You have specialized knowledge for getting the job done. A good business appraiser is aware of that and will  look at your entire business. Because a professional appraiser only works on valuing businesses, they can tell you where you may not have enough cash in the business, too much of your assets tied up in equipment or whether the investment you're making is a great deal or a terrible risk because of the cash flow situation.

Comparison to Other Businesses

How does your seafood restaurant compare to others in the market? Because business valuation specialists spend their time valuing businesses, they can quickly see factors that you're not taking into account. How does your revenue and earnings stack up against similar companies?  

Statistical Comparisons

A good part of this process is using ratios to compare your business growth to that of other businesses, both locally and across the country. They can be used to determine ROI on both assets and equity. They can also be used to calculate safety and liquidity, a current ratio, a quick ratio, debt to equity and sales versus working capital, along with others.

Industry-Wide Comparison

There's also a focus on the industry as a whole. Even if you're still selling oil pipeline, the oil industry may be going into a serious slump. That means you could be facing a cash flow and market crisis shortly. A good business appraiser will look at the industry as a whole and your part within it to help you project where your business will be going in the future. 

As you can see, valuing a growing business gives you great insights into what you need to do to continue that growth curve. But don't use just any appraiser, make sure you're working with a certified business appraiser who has the experience to calculate a comprehensive business valuations for your business. Don't have one to work with who is familiar with your industry and experienced in the type of business appraisals you need done?

Imagine that the day has finally come to sell the family farm. Do you know how much your farm might be worth to young farmers looking to buy a working farm? If you set the value of your farm too high, no one will buy. If you set the value too low, you leave money on the table. Learn business valuation methods that work for farms to ensure you set a fair asking price when selling your farm. 

What Method to Use for Valuating a Farm? 

There are many ways that you can take the value of a farm prior to a sale. Here are a few methods that are commonly used when evaluating farm values: 

• Net worth - Many farmers are used to taking the net worth of their farm every year. Yet a net worth gain only measures an influx of cash, and does not account for the value of the land. Net worth can be used to demonstrate the farm's return on equity, and show how productive the farm is compared to others like it. However, net worth alone is not very useful when taking the valuation of a company prior to a sale. 
• Discounted earnings method - Another method that's commonly used for farm valuations is the discounted earnings method. In this method, an appraiser will calculate the value of expected future earnings in today's dollar. This method is often used with businesses that, like farms, may have inconsistent earnings from year to year. If your farm has a lot of anticipated cash flow, it could be seen as a hot commodity on the market. 
• Market value - It may be useful to directly compare your farm to that of others near you for sale, by taking a market approach to company valuation. In a market value approach, you might find several farms that offer the same products, are roughly the same size, and are in comparable locations.
• Asset approach - In some cases, it might make sense to use an asset based approach to tally the total value of assets on the farm. Farms tend to have a lot of expensive machinery and heavy equipment, such as tractors or combines. Anyone who buys the farm assumes possession of these valuable assets, so it makes sense to include their monetary value in the farm's worth. It can make sense to value your assets if you want to see them separately from the farm; say, at a machinery auction. An equipment appraisal may also be suggested.

Since the valuation you set for your farm has an immediate impact on how much you stand to reap in a sale, it's in your best interest to have the farm professionally appraised. You may want to do this a few years before you plan to sell the farm, so that you have time before the sale to make improvements that increase the farm's value. 

An appraiser who has experience with the farming industry can examine your farm, determine the appropriate method or combination of methods to use, and complete the appraisal for you. Then all you need to do is advertise the farm for sale.

When you are considering a "divorce" from a partner, it can be very messy trying to figure out an equitable solution to dealing with your business, especially in community property states. Both sides want to benefit from the deal, and it can be hard to find a solution that everyone can live with, especially when one or both of the spouses want to continue working in the business and the parties are not willing to work amicably towards an agreement. But a divorce business valuation can provide a quality valuation of a company that uses standard practices by a qualified, impartial appraiser to determine a fair value and a fair deal for all concerned. Here's how getting a company valuation works in a divorce works and the specifics of which valuation methods are used in this situation.

Using a Business Valuation to Get a Fair Deal in a Partnership Divorce

• It's important that you get your valuation of a company through a qualified, certified business valuation appraiser. Because a professional appraiser has gone through the training and nows the appropriate standards to use in your situation, doing so will help you avoid spending money on an appraisal from an untrained person that may not hold up.

• One method often used in business valuation is the market approach when looking at comparable businesses. By taking into account different business attributes and investment risks, it's possible to develop a comprehensive valuation that is fair and equitable to all sides in the business.

• Though it's common in non-adversarial situations to use a comparable transaction method under the market approach, the most common data source only go back a single year, but doesn't address prior years. Because a seller in non-adversarial situations is often actively trying to paint a good picture of the business income to get the most out of the sale, this approach doesn't work well in a partnership divorce business valuation.

• When a qualified business valuation appraiser is used, it's easier to find an equitable solution to the problem. This is especially important in situations where there are allegations that one party has not been running the business honestly. Because a qualified valuation specialist can study the figures that play into the business' final valuation, it's easier to locate potential problems or mis-reported figures.

Though partnership divorces are, by nature, painful and emotional, coming to a fair and equitable valuation for your business doesn't have to be.

When you are trying to determine the valuation of a company, one of the most important things that comes into play is the approach. Because business valuations are sought for a wide range of reasons, from selling to divorce to mergers, the approach must be customized to the particular situation. In this piece, we'll take a solid look at different approaches to determining company valuation and in which situations they're typically used. 

Different approaches to determining business value

Asset-Based Approach

Though asset-based business appraisals may seem like a good route to explore, they're typically only used in liquidation situations, not by healthy businesses planning on managing risk or expanding. Why? Because if you've spent years building your business and establishing a good reputation in your industry and region, you know that your business is worth much more than the sum of its parts. Asset-based approaches only figure the minimum liquidation value of your business assets instead of looking at the value of an established business in the community or the goodwill that it has created. For this reason, we virtually never used asset-based methodology to determine business value.

Income-Based Approach

An income-based approach uses the current value of future income to calculate a business appraisal. It looks at what the income has been in the past and projects it out for a period of years. The most common methods in this approach are capitalization of earnings and discounted earnings, also referred to as discounted cash flow.

• Capitalization of earnings takes into account the business earnings and is mainly used when results are steady.
• Discounted cash flow looks at the expected future business earnings putting more weight in near years versus out years.

Market-Based Approach

By comparison, the market-based approach looks at substitution. The appraiser looks at how much similar businesses have sold for, then adjusts the sale price on the differences between your business and the ones being analyzed. Because the businesses have things in common being in related industries, it is a good method to see what actual acquirers pay.  The most commonly-used methods are as follows:

• Guideline public company looks at a similar public company compared to your private company. If you are valuing a small business, this might not be the best way to compare entities.
• Guideline company transactions take similar companies with similar transaction levels and then adjust for any differences. The transactions are then applied against a multiple to determine the value of the company.  Databases provide details of small business transactions.
• Multiple of discretionary earnings looks at similar companies and what kind of discretionary earnings they make, then adjusts it to the company being appraised to determine business value.
• Gross revenue multiple looks at the gross revenue of similar companies and adjusts it to the company under appraisal, then uses a multiplier to determine value.

By knowing the different approaches, you gain a better understanding of how valuations work and why your appraiser is selecting a particular method.

When you are looking at having the valuation of a company determined, business valuation services are one of the most common places to investigate having the business appraisals done. But how can you tell whether the business valuation services you're investigating are able to do the company valuation effectively , efficiently and accurately? Here are some tips on what to look for in quality business valuations companies:

What to look for in quality business valuation services

• Certifications: Do the business appraisers have certifications from the American Society of Appraisers, American Institute of Certified Public Accountants, National Association of Business Certified Valuation Analysts or Institute of Business Appraisers? These accreditation organizations have been set up to ensure that business appraisals are being performed in a uniform fashion using the methodology that best applies to that situation.
• Business History: How long has the company been in business? You don't want to trust your company valuation process and your company's private records to a company that may not know what they're doing or may expose your company's data to any number of outside interests. A company that has a proven track record can get the job done right without a lot of changes needing to be made. One exception is a newer company that has proven professionals with significant experience behind them, but even then, you should be aware of the potential risk.
• References: Any service providing the valuation of a company should be able to provide you with references from satisfied clients. If the company is unable or unwilling to provide these references, it's probably because they have poor customer service or have unhappy clients.
• An Appeal Process: What happens if you feel the company valuation provided is inaccurate or didn't use the correct information when calculating the valuation of a company? Because company appraisal can be a somewhat fluid process, most company appraisal services offer an appeal process to ensure that the business appraisal provided is an accurate representation of your company.
• Knowledge of Several Approaches: Business appraisal is not a one-size-fits-all process. Depending on your specific needs, there may be a need for one of several different potential options when valuing your business. A quality business appraiser knows not only the several different approaches available, but will also know exactly which one provides the best possible fit for your company and exact situation.
• Availability and Approachability: Though part of the process of hiring a professional business appraiser means trusting them to get the job done, that doesn't mean you shouldn't be able to speak with them on areas of concern. Is the company appraiser available for consultation? Just as important, do they seem approachable if there is a problem? An appraiser who isn't willing to help explain their approach will leave you confused and wondering how accurate the final report will be.

Now that you know what to look for, it's time for action.

In the world of business valuations, there are many different circumstances where knowing the valuation of a company can be a valuable piece of knowledge. But how do you value a business for your particular circumstances and why will a business appraiser take a particular approach to determine your company's value? Here are some common reasons companies have business appraisals performed and what type of approach is specifically used to get the best result.

Circumstances and approaches: How do you value a business?

Preparing to sell a business

Having a business appraisal performed on your business helps in two ways when you're considering your exit strategy. Firstly, it provides you with insight into where your company may need to be improved prior to offering it for sale, giving you the chance to fix these issues and get a higher asking price. Secondly, it provides documentation of value, giving you a point of strength to negotiate from during the process. Either a market or income approach will help you get everything your business is worth.

Divorce or end of a partnership

In either situation, a business is often the largest combined asset. Because things can get ugly quickly when a partnership goes south, whether of marriage or business. Because of this reason, it's important to know the valuation of a company to determine a fair price to buy out the other partner. This area of appraisal practice is so hotly argued, it often falls under state law in terms of what type of approach must be used in this circumstance.

Considering a merger

If you're thinking about merging with another company, which company is in a position of strength? Having a business appraisal performed on both companies helps you work out the nuts and bolts of where the equity and assets lie, in addition to community reputation and similar areas of concern so that a fair price can be determined that benefits both parties.

Looking at an opportunity for growth

When opportunities arise, you need to be able to react quickly. Because a company appraisal helps you know exactly where your company stands, you know virtually immediately whether the new opportunity is a great way to grow your business or if it's a huge risk that could expose your entire operation to significant loss.

Back-up documentation

Did you know that an estimated 25% of businesses that go through a major disaster never open their doors again? One of the main reasons for this high rate is the lack of documentation of the business' true worth. Unless you can prove that your company is worth more, your insurance company will only pay for your assets that were lost, not the goodwill and potential income that you've lost. Having a proper business valuation performed that takes these characteristics into account provides legal documentation of your company's actual worth instead of a simple reimbursement for lost assets.

Passing on ownership to the next generation

How much is your business worth? Knowing the valuation of a company helps when dealing with estate taxes and similar issues when it's time to pass on the family business you've built for so many years to the kids.

To answer the question of how do you value a business, you now know the many different reasons why particular approaches are used.

Smart businessmen and women understand that it is important to consider selling a business before the day arrives. Yet all too often, medical professionals -- from wellness providers and holistic health care providers to medical and dental practitioners -- do not have an understanding of key business concepts that can help sell their practice. Learn how to value a company and why you need to do this before you put a medical practice on the market. 

How to Value a Company in a Medical Field

There are many different company valuation methods that a business appraiser might use to value a company. Commonly used methods include the asset, income, and market approach. 

Asset-based company valuations focus on the value of business equipment and assets. If you have a lot of modern specialized equipment, such as x-ray and diagnostic imaging machines, then an asset-based approach may benefit you. 

An income-based approach may examine your cash flow or take capitalization of earnings. The latter method works well for established, stable businesses such as an orthodontist office that has a demonstrated pattern of regular patient growth over time. 

A market approach might compare the medical business to those similar to it, or use multiples of growth revenue. This approach works best when there are similar businesses in the community to compare your medical business to, and does not work as well in rural areas. 

While you do not need to know the fine details of these different methods, it is helpful to understand the basics so you can review your appraisal report. After the appraisal, you may decide to make strategic business investment to grow the value of your company before a sale, especially if the sale you anticipate is far off. 

A business appraiser can discuss your needs, your business history, your growth, and your reasons for selling the business. Based on the information gathered, the appraiser can then select the right approach or combination of approaches to obtain a fair market value for your business. 

Why You Need a Business Appraisal for a Healthcare Practice

If you try to sell your healthcare practice without getting an appraisal first, you risk setting yourself up for a frustrating experience because you do not understand the true fair market value of your company. You might be sentimental about your company and set a price too high to receive an offer. Alternately, you may undervalue your business due to personal fears and end up selling the company for less than you deserve. 

Knowing the valuation of a company, you can understand its unique selling points and better market your medical practice to new dentists, doctors, or health and wellness experts. You can decide if you want to sell the business as-is, sell equipment separate from the business, or sell your practice separate from real estate. You might retain building ownership and transition into being a landlord renting office space. 

If you are considering selling your practice to a hospital, as is common at the present, you may want a business appraisal as a form of leverage. When you know your practice's value, you are in a better position during negotiations. 

At Business Valuation Specialists, we perform business appraisals for a wide range of companies, including medical practices. Let us take the lead in your business valuation, so you can sell your medical business for a fair price. 

Though you know that business valuation companies provide valuable information that helps you determine the financial health and well being of your business, the valuation of a company is a complex process that often leaves business owners scratching their heads in confusion. Business valuations typically go through a number of steps before the calculations are complete, each of which are vital in their own way to the final figure. In this article, we'll discuss the basic steps business valuation companies take in determining the final value of your company.

How Business Valuation Companies Work

1. The first point where we start gathering information is through our first contact with a prospective new client. We'll chat about what your business does, where its strengths and weaknesses are, and the industry it's in. We'll also talk about the reason you need a valuation, as it will be approached differently based on the circumstances. 
2. Based on the information gathered, we'll provide an initial quote for the cost of our services, so you know what to expect once we've completed the valuation of a company. The valuations we provide can serve as proof of company value to interested buyers or financial institutions you're working with.
3. An agreement is signed and the fees paid for the business appraisal. By having a contract written out specifying what type of appraisal is being performed and the fees laid out ahead of time, both parties know exactly what to expect and what is expected of them in the company valuation.
4. We'll send you a questionnaire about your business. Once you've had a chance to complete it, you'll return it to us for evaluation, along with 3-5 years of tax returns or financial statements. Though it may seem like a great deal of information at first, having that information helps us provide an accurate valuation.
5. After carefully analyzing the questionnaire and financial statements or tax returns, we'll perform an in-depth analysis of your industry and business. The approach we use towards valuing your business will depend on specifics related to your business. 
6. The analysis will be written up in a valuation report that covers everything that was considered during the appraisal process. Because our appraisers have been trained to national standards, the written report will stand up to scrutiny.
7. The report is sent to you in PDF format and will schedule a follow-up telephone call to discuss the results, if you wish. This gives you a chance to ensure that everything in the appraisal is accurate and that you can discuss possible discrepancies with the appraiser so that corrections can be made if necessary.

Now that you have a better idea of what business appraisals entail, it's easy to ensure you have the right documentation ready ahead of time, saving you and the appraiser valuable time in the process.

It's no great secret that small businesses are more flexible and nimble than larger companies, able to change production, focus and market more quickly than their larger counterparts. But as a small business owner, how do you ensure that you're not exposing your enterprise to excessive risk that could cost you your company? Valuing a small business gives you great opportunities to really see into the nuts and bolts of where your company is strong and where it needs improvement, allowing you to manage risk more effectively to take advantages of opportunities as they become available.

Maximizing Flexibility

There's no doubt that flexibility and the ability to nimbly change direction is one of the greatest advantages of small businesses over large businesses. But changing direction requires that you know the condition of your business before starting the change. Is changing your business to take advantage of market conditions or the business environment going to create growth for your company or slow it to a stop, even possibly putting it and everything you've worked for at risk. To take maximum advantage of changes in your market, you need to know exactly where your business stands to determine the maximum flexibility and profitability you can get out of it. One of the easiest ways to achieve this goal is by valuing a small business.

Knowing Strengths and Weaknesses

But how does the valuation of a company help you make it more flexible? All businesses, markets and owners have different strengths and weaknesses, but knowing where your business lies through a company valuation provides you with the information you need to know whether an opportunity is a good one that plays to your strengths or a bad one that preys on your weaknesses, leaving you open to significant risk and even the potential loss of your company and livelihood. Business valuations are one of the best ways to determine where these strengths and weaknesses lay, whether it's in undervalued equipment, overvalued assets or poor cash flow issues.

Reducing Risk

Valuing a small business allows you to know whether taking a particular approach to the market is a good idea or not. Business appraisals help you determine whether your business location has changed in value, keeping you from taking out a loan against your business property that is higher than the value of the property. It also helps you determine what your actual expected business income may end up being when you've had irregular income in the past, instead of making a change in your business based on a recent boom in your market that could leave you stranded when the market normalizes again. If you're considering a merger to expand your market share, will the new company reflect your company's strengths or pull it down by making weaknesses worse? By knowing exactly where your company stands, you can make business decisions that will leave your business strong instead of opening it up to potential risk and loss.

By having your business appraised by a qualified appraiser, you can ensure that you're making wise business decisions that will leave your company in the black and successful. Taking the time to have a business valuation performed gives you the tools and insight you need to be successful.

When you run a manufacturing company, there are many areas where you can make improvements or tap into additional value. Some of these involve taking risks in entering new markets, doing extensive mapping of your strategy or planning your actions in the market when you're not sure what the future may hold. But one of the most under utilized tools used for finding hidden value in your business is the business appraisal. Business appraisals look at a wide range of factors to determine a business' true value. It also makes it easier to find where your business has potential for significant growth. Here's how having a business appraisal performed helps you find that hidden value.

How valuing a manufacturing company reveals hidden value

The first area you'll find value is where your business is not performing up to standards. How is that adding value? Because it helps you ensure your company is as strong as possible. This allows you to improve your business, building its value. Are your assets overvalued because they receive more wear and tear than your competitors? Is your overhead too high because you haven't replaced the old, power-hungry light fixtures in your plant? Is there disruption happening in your industry that may lead to a downturn for more traditionally-modeled businesses? By knowing where your business is weak, you know where to improve it to ensure it will do better in the future.

But how do you compare to your competition? Because business valuation specialists spend their days working with a number of businesses in your industry or related industries. This gives them the insight to what a healthy manufacturing business looks like. They can compare your business to others that are similar or to similar businesses in other industries that are going through the same type of conditions and issues your business is facing. Is it a good time to diversify your production line? Should you look at digitizing your operation to reduce overhead? Having a business appraisal means you can learn from other business' mistakes and successes.

When you're considering expanding your business by merging with another company, do you know the condition that company is already in compared to your own? A company valuation of that business provides the same level of insight. If that company is strong where yours is weak and vice versa, they may be able to compensate across the board and make the merger a success. If, on the other hand, you're looking at a business that has similar weak points, you could simply be taking on unnecessary risk that could cost you your existing manufacturing company. By having a business appraiser take a solid look at both companies, you know what you're getting into from the start or can avoid making a bad investment all together. 

As you can see, there are many areas where your manufacturing company has real value that may be hidden. By taking advantage of the information provided in business valuations, you can improve your business' position in the market and take smart opportunities. If you need help getting the valuation of a company, it's important that you work with a business appraiser who has the necessary training and experience to give you the information you need.