Business Valuation Blog | Understanding Buying / Selling a Company

A business valuation calculator can provide you with a quick insight into how your business is performing and what it might command for sale on the open market. Yet is this calculator really an effective replacement for getting the valuation of a company taken by an appraiser? Learn what a business valuation calculator can -- and can't -- tell you about your company's worth. 

What is a Business Valuation Calculator? 

A business valuation calculator is a simple tool that allows you to gauge the worth of your company by entering your total earnings in a fiscal year. Add to your earnings the taxes paid, amortization, net profit and interest, which is sometimes referred to as EBITDA, to get the total earnings. 

By adding a multiplier for your industry, the calculator can give you a range of high and low values for your business. For example, let's say your total earnings for a year were $200,000 and you have a small service business. A calculator would take your $200,000 and multiply it by the industry multiplier to generate a business value ranging from $X to $Y. 

A calculator is a useful way for small business owners to get an independent and industry relevant idea of what their business is worth. However, it is no substitute for getting a company valuation from an appraiser who understands the niche you operate in. 

Business Valuations vs. Valuation Calculator

Business appraisers not only can review your income and earnings and calculate the financial worth of your business, they can integrate industry specific trends and forecasts into the valuation. Since business appraisers take the time to research your business, they can add in subjective variables that would nonetheless affect your company's value if you were to sell it. 

For example, if your business is growing rapidly due to changes in the industry? On the other hand, if your business is about to become extinct due to changing competition or technology, your company might be worth less. 

A calculator has no way of knowing this level of information about your company. As a result, the information it gives you is only somewhat accurate. Were you to rely on the calculator alone to evaluate an offer for your company, you might settle for too low of an offer or set an unrealistically high price for your small business.

While a calculator is a useful check on your business worth, it is no substitute for the in-depth opinion of a qualified appraiser. If you would like to get a professional evaluation of your business, look for an appraiser who is credentialed by a major industry organization and can explain the appraisal process to you in plain language. Since you will naturally want to act upon the appraiser's report to sell your business or increase its value, you will need to understand the valuation and the appraiser's logic.

When you operate an industrial company, you face unique challenges and benchmarks compared to other businesses. Overhead, fluctuating supply and commodity costs, labor issues, specialty machinery and production requirements - it can be a real challenge to keep your business operating profitably. But how do those differences translate into the valuation of a company? Here is some insight into industrial business valuations and how they're different from other business appraisals:

Common differences in valuing an industrial company

Manufacturing companies are often valued using a methodology that focuses on assets or income potential. But there are a few different areas to consider instead of simply adding a few figures together.

Assets that produce income must be identified, because industrial companies have a lot of equity tied up in assets. Equipment that must be specially tooled or specific requirements for operation may have additional costs and lower equity. Beyond material assets, what about intellectual property and brand goodwill that have been developed over the years? What about plant capacity that is not being used fully? Those assets can also provide a generous amount of equity that is not being considered in many situations.

At the same time, prospective capacity and production doesn't guarantee income. This requires a fine touch on the part of the company valuation specialist, to determine what a likely future income would be without overstating things. Is your company adding innovation and upgrades to your products? If you aren't, obsolescence can quickly reduce potential income.

Have there been sales forecasts made in the past? If they fell short of the forecasted expectation, they will need adjustment to better represent future income. This can include removing accounts receivable that are far out on the aging report and are expected to be uncollectible. Is the inventory current or does it need adjustment to reflect current market conditions? What kind of transaction are you preparing for? This last one will make a great deal of difference on your final valuation, as a company that is solvent but facing a divorce has a very different process than one that is going into a solid expansion phase.

What about liabilities? Is your accounts payable up to date with all payroll and taxes accounted for? Are there any outstanding loans that need to be repaid? What about the cost of complying with regulatory agencies? Though this may seem a bit intensive for businesses that have not had business valuation services performed in the past, they provide a more realistic look at the numbers and whether the business is operating at a sustainable level. 

What is the market doing as a whole? Are suppliers expected to remain stable and at the current cost forecasts? Are there more than one supplier available for those materials? What about the industry? Is there still a demand for that product and is the company's reputation for innovation part of its brand goodwill? All these factors will play into how successful a business will be well into the future and will help the appraiser determine the right method for valuation.

By getting a valuation of your industrial company, you're helping to ensure it will remain successful down the road.

You work hard to make your business successful. But do you know where your business' best market position is? By valuing a woodworking company, it's much easier to see which segment of the market your company will see the best profits. Here's a look at several ways a business appraisal helps determine the best course of action:

Craftsman Quality: Valuing a Woodworking Company for Market Positioning

What does your company do well and what does it do poorly? You know you need a unique selling position, but maybe you are not quite sure what that position actually is. Does your company provide basic MDF furniture that comes ready to assemble or masterpieces of grain and craftsmanship? Does it operate best by providing one of a kind heirlooms or mass produced pieces? It could even be that you're still figuring out where your business needs to market itself to get the best profitability. Business valuations help provide insight into your company and where it is best suited.

A quality business valuation takes into account not only your business' net value but also the state of the industry, your competitors and the strong and weak areas in your business. A business appraiser who has experience in your industry can often see patterns or potential problems you may not, giving you great insight into how your business is functioning. Do you have too much money tied up in equipment that is ineffective, costing you labor and utility overhead? Is there a cash flow issue that is lurking in the background? Does your business have enough equity to invest in a new direction or will it be too high a risk of losing your business if things don't work out as you wish.

A good business appraiser also has experience in the industry and may be able to spot changes in the market that you haven't anticipated. If the economy is in a slump, a mass-produced line of inexpensive furniture may sell well, while a company specializing in high-quality, unique pieces may need to alter their marketing approach compared to when the economy is doing well. Alternately, when the economy is thriving, there may be less demand for inexpensive furniture and more demand for higher-quality items. 

What about your competition? What sets you apart from the rest of the crowd? A business appraiser may be able to note areas of your business that boost your business' unique selling point. You could have an exceptional website and digital marketing program that positions you for internet sales. Maybe you have contacts with larger distributors that allows you to get your work into the stores faster or more easily than your competitors. Because a good business valuation provides detail customized to your business and your current needs, you get much more out of the report than just a simple calculation of your business' value.

By valuing a woodworking company, you can get great insight into what your company does well and where it needs improvement. This helps you position your company for success while fixing any issues that may have shown up in the valuation of a company.

When you own or operate a trucking company, there's no doubt that you're working in an industry that is always evolving as time passes. Many owners and executives are regularly valuing a trucking company. Are you? If you are not having regular business valuations performed, you could be missing promising opportunities, could be unknowingly operating your company at a loss or may find your business in peril when you take advantage of what you thought was a great chance at the time. Here's why it's vital to have regular business appraisals performed on your company.

Roll On: What are the Benefits of Valuing a Trucking Company?

Avoid Serious Risk and Take Advantage of Opportunity

One of the biggest issues we see in companies who have not had a recent business appraisal is that they don't realize the risk their business is in. There are a wide range of factors in trucking that can seriously impact overhead and profitability. Assets can rapidly drop value while becoming more expensive to operate. Commodity prices change, making yesterday's sweet deal a costly proposition. Market changes require adaptation to respond to modern logistics in new ways. What shape is your company in? Accountants often focus on tax accounting for providing operational numbers. The problem with that is you may have equipment still in play that has been completely depreciated, but still has real value. A business appraiser focuses on what is, not what the tax code says.

Stay on Top of Fleet Changes

Why else do you need the valuation of a company to operate successfully? Changes in your fleet. If you purchased a yard full of shiny new Freightliners or Macks a few years ago, those trucks now have anywhere from a quarter to half a million miles on them, with an average yearly mileage of over 100,000 miles. Not only does this decrease their value, which any equipment appraiser can tell you, they also cost more to keep on the road. An aging fleet means you'll need to spend more on maintenance and repairs to keep your fleet rolling. This means you'll have lower profitability and higher overhead than when you first purchased the trucks. Even if you're doing rotational procurement of equipment, changes in the equipment can turn into changes in value as one type of truck has more problems as it ages or another decreased in value more quickly.

Sail Through Commodity Changes

Let's not forget the headache every fleet manager and trucking executive always has to deal with. Changing commodity prices automatically brings diesel prices to mind, but what about the rising costs of plastic for parts, higher engine oil change costs and even a higher cost of food for your drivers' dinner at a restaurant away from home. Nobody can accurately predict market changes. If they did, they'd be rich! But an experienced business appraiser may be able to spot trends in your company to help you sail through the tough times and take advantage of the good times.

By regularly valuing a trucking company, you can take advantage of favorable opportunities while avoiding risk.

Have you ever had someone ask about buying into your company but you don't know what the shares are really worth? Maybe you need to add equity for a serious expansion but aren't sure about how the valuation of a company will affect the share cost. You could be adding new partners who will help build your business but don't know what the share value will actually end up being. When you're adding additional shareholders to your business, you probably have a lot of questions about how much each share will be worth. A business appraisal helps you know your business' true value so you can pass that cost onto your new shareholders.

How Business Valuation Helps when Adding Additional Shareholders

• Assures the existing shareholders of their shares' value. When you add shareholders to a company, your existing shares will be diluted as the new shareholders increase the number of shares in your company. That means your existing shareholders will want proof of the existing value of the business so they know they won't be losing money during the sale of new shares. As an example of this, having 100 shares in your company distribute among two partners means each partner has a half interest in the company. If you're adding two partners and 100 additional shares, suddenly each partner has a quarter share in the business instead.
• Provides a basis for pricing new shares. If you're selling shares, you'll need to determine a price for the shares. How can you accomplish that if you're not sure of the value of your business? By having a company appraisal performed, you can determine the current value of your company before you try to price the shares.
• Provides documentation for new shareholders. When you're adding shareholders, whether as a sale of shares to raise equity or providing a new partner with shares in lieu of cash payment, the shareholders will want documentation so they know what each share is worth. If you can't document the value, how would the new shareholder know that the share is worth the paper it's printed on?
• Ensures you're not undervaluing or overvaluing your shares. Far too many businesses base their business value on a tax return or a balance sheet that may not reflect accurate business values. In tax accounting, assets are often depreciated by having their value distributed across a standardized depreciation table that spans a particular period of time. What if your equipment is worth more or less than its depreciated value at that time? At the same time, basing your business value on the sale price of similar businesses in your area may not reflect an accurate value either. A proper business appraisal will.

Adding additional shareholders to your company can be stressful, so don't make it any more stressful than it needs to be. By having a company valuation performed to determine the value of the shares, you have easy documentation for your shareholders both prior to and after the addition to verify the sale and cost of shares. If you haven't had business valuations performed on your company recently and need one done to add shareholders, it's important that you get that documentation.

It's understood that when you're in business, you're taking a risk. Your flower van could be in an accident, your accountant could rob you blind or you could come across any number of similar situations. But what would happen if your business partner or another vital team member of your business passed away or was incapacitated and unable to work?  Though the valuation of a company may not seem to have much in common with key person insurance, having that information helps prove what their contributions currently are to your business. Here's why.

Key Person Insurance: How a Business Valuation Helps Find Policy Value

• Losing a key person isn't just about replacing them with a similarly skilled new hire. You're going to have to get that person through a learning curve, including additional education or training. Having the right policy value for your insurance helps ensure that your business will continue to flourish even through tough times. Replacing a key person is an in-depth process that can take several weeks or months to straighten out, during which time you  may lose customers, need to sort out the differences and put new plans into effect.
• Having coverage makes it much easier to get loans to cover your other business expenses. Coverage shows up as a debt, and because you're managing more money successfully through your business, your business' credit worthiness is boosted when you get insurance to cover your key personnel from loss, injury or illness. This, in turn, leaves you eligible for expansion, training and recruitment to ensure you're able to expand your business where needed or add new employees to replace those that have been lost. 
• Business valuations provide a solid value for your company and its particular needs at that point. Having business appraisals performed by a certified business appraiser, the appraiser knows exactly which appraisal method to put into use to ensure the best possible value for your company. How much insurance do you actually need on your business partner? Are you including incidentals such as a new paring pass, advertising on a job board or outsourcing work that doesn't meet your company's definition of key person replacement expenses? 
• Get a better grasp of what exactly your company is worth. Many business owners have a hard time coming up with an accurate picture of their company's bottom line. Because business values calculated by a business owner or manager are often based off of tax accounting records, it's important to understand what those figures represent - a lower figure that takes advantages of all possible tax credits while using a standardized depreciation sheet that may not accurately represent your company's real value. By comparison, an appraisal takes into account many different aspects of your business you may not have considered, such as favorable or unfavorable market conditions.

Key person insurance can go a long way towards helping your business back to its feet following a significant death or disability in your company. It helps fill the gaps while you search for new talent or raise existing talent to a new level.

When a business is started, one common way to raise capital is by selling shares in the business or offering shares as part of a compensation package to help secure a talented individual for your company. But what happens when a shareholder wants to leave the business? If you want to retain control of the company, you'll need to buy out their shares. How do you know what a good price is for the shares? One of the best ways to approach this problem is through the valuation of a company. Let's take a good look at how a business valuation can help determine price when buying out an exiting shareholder.

Buying Out an Exiting Shareholder: Using a Business Appraisal to Reach a Fair Agreement

However the situation has come about, when one shareholder wants to leave a business, you want to ensure you can control those shares. But what value do those shares have? How do you determine a fair price? The shares may have had a particular value when you opened your company, but as your company has grown and changed, it's become more difficult to put an exact figure on the shares. To determine their value, you need to know your company's appraised value. But how is that figure determined? You could base the value on the sale of similar businesses in your area, but those businesses often have many differences that make it difficult to compare...and are the rumors of what the business sold for real or a bunch of B.S.?  In this situation, many companies use business valuations to determine a fair price for a share buy out.

Exiting shareholders are bought out for a wide range of reasons. Sometimes it's a good one, because they're retiring or moving to a great new location, and you want to make sure that they're getting their fair share of the equity in the business to ensure they do well in their new situation. Sometimes you're dealing with a difficult situation, where the split is on bad terms, such as partners not getting along, differences in vision for the short-term and long-term goals of the company, differences in your work ethic, divorce, or similar issues. The exiting shareholder in this situation may be demanding a share price you feel is too high for the business to reasonably bear. Anytime there are multiple owners in a business, it's wise to have a buy/sell agreement in place ahead of time to plan for these types of unforeseen events. That way, everyone knows ahead of time what the policy is and agrees on how the valuation of the business is to be handled in these situations.

When you know what your company's shares are worth, you know you're making a fair offer instead of worrying about whether you're overpaying or stripping the business of the vital capital needed to remain in operation.  Business appraisals are a great way to determine value when buying out an exiting shareholder in your company. It also gives you a baseline tool for many other business purposes, which you can read about in our other blog posts.

As our world becomes more connected, the role of distribution companies in daily business and personal life is becoming more and more important. From direct-to-consumer sales to ship-to-store and similar offerings that are becoming more popular, investing in a distribution business seems like a great way to improve your financial standing. But valuing a distribution company before putting your hard-earned cash on the line is smart business. Here's why:

The Case for Valuing a Distribution Company to Ensure Your Investment

Distribution businesses often operate on somewhat slim margins, with productivity and efficiency improving or reducing profitability very quickly. For this reason, they can either make money or lose it very quickly with just a few changes in business practices. A company that is being run productively often has exceptional managers and executives focusing on constantly improving the business' bottom line, making it an excellent investment. But what kind of returns should you expect?

Past performance isn't always a good indicator of future profitability. Changes in management, procedures and the market can all drive profits up or down, depending on how they affect sales and profits. Figuring out what each change can mean can be difficult, if not nearly impossible for the average entrepreneur or investor. For this reason, many savvy investors rely on business valuations to get a better idea of what to expect in each investment opportunity. Why?

The valuation of a company takes many aspects of the business, industry and market into consideration when developing a quality business appraisal. The company valuation will include details such as how efficient and profitable the business is at current. It will look at what processes and management techniques are driving success in that distribution model. It will investigate the industry and whether it's heading into a boom or a bust cycle, as well as how the business compared to its competitors. The company valuation will also look at the market and determine whether it is expected to see the same demand in the future.

This type of information is commonly provided in more general business appraisals, but using it to determine profitability in a distribution business can help you ensure that your investment makes sense. The business appraisal will provide you with details to ensure you know not only what the rewards of investing in such a business may be, it also provides you with the drawbacks and potential risks that you could be assuming with your investment. By going into an investment situation with a distribution company with a quality business appraisal, you can rest assured that you're investing your money with your eyes wide open. 

We've all heard of investment opportunities from business owners looking for capital. Very often, these opportunities seem too good to be true, and typically are just that. By hiring a certified business valuation specialist uses a standardized methodology to ensure that you're receiving a report from a neutral third party.

As you can see, valuing a distribution company can make a big difference in ensuring your investment is sound and likely to provide great returns.

In construction, we tend to think in terms of board feet, squares and yards of concrete. But what about the business side of your construction enterprise? Valuing a construction company is a vastly underrated practice that helps ensure your company will stay solvent for years to come. Why? Here are some ways you can use quality business appraisals to get more out of your business, reduce your overhead and improve your outlook.

A Good Estimate: Why Valuing a Construction Company is Vital to Growth

The construction industry is one fraught with risks to your business. From economic downturns to bursting housing bubbles to constantly shifting market prices, it's hard to stay ahead of the curve in construction. With today's rapid changes in economic growth, how do you stay ahead of it all? Though business owners often associate business valuations with selling or closing a business, these tools deserve a place in your business toolkit right next to your circular saw, impact driver and trusty old hammer.

Business valuations help you gauge your company's fiscal health and determine where it needs improvement. A qualified business appraisal specialist can spot areas in your operation that are wasteful of resources or opportunities to improve efficiency. They can take a look at your finances and determine whether you're able to continue in that fashion or whether you need to take a good, hard look at your cash flow situation.

A business valuation specialist can also determine where your company is strong and where it is weak. They can compare your operation to the industry average and suggest improvements. A certified business valuation appraiser can help you make good business decisions based on current market conditions.

A quality valuation also helps you determine the heath of the industry and current market as a whole compared to your company. A certified business appraiser spends their days appraising companies, so they have a good idea of how you compare to other businesses of similar size to your company.  You may also want them to perform an equipment appraisal to get a good understanding of the equipment value in case you are considering upgrading your fleet of equipment.

By valuing a construction company, you can ensure that your business will remain successful and avoid the worst risks the construction industry can throw at you. If you haven't determined the valuation of a company yet, what's holding you back?

When you work in manufacturing, you often work with numbers on a daily basis. Specifications, supply costs, overhead: these numbers are very important to the daily operation of your company. But what about valuing a manufacturing company? There are many benefits to having business appraisals performed on your business for a wide range of reasons. One area where manufacturing companies see real results from business valuations is in reducing overhead and production costs through a solid look at where your company is strong and where it is weak. Here are some ways  business appraisal helps:

Maximizing Production: Valuing a Manufacturing Company

Improving Production and Operations

One of the first areas where you'll find room for improvement in your business is through a solid study of business operations. An experienced business appraiser can provide insights into where your company meets the average, where it excels and where it is lacking. Because a business appraiser looks at specific parts of your business, they can quickly determine, for example, if your company is losing money in excess manufacturing waste, inefficient machinery that uses too much electricity or material and whether you're paying too much in property taxes due to a poor assessment by your local tax assessors office.

Improvement in Management and Accounting

Another area where there's room for improvement is in management. If your company is relying on tax accounting records to estimate value, assets and equity, you may be selling yourself short. Tax accounting often depreciates value for a piece of equipment over a specific period of time. If your equipment is failing before that point, you're not getting the full depreciation out of it and you may be overestimating your assets, because the machine is not worth its depreciated value. On the other side of the coin, machinery that is lasting significantly longer than the depreciation period may still have value when the books report a zero value. That means you aren't able to take advantages that come your way, because you don't think your assets are high enough to cover the potential risk. In either case, a business appraisal allows you to determine when to replace vital equipment, providing better budgeting intelligence.

Projecting Income and Market Growth

But what about income? When you're getting ready to expand your manufacturing operation, being able to project your expected income is important both in assessing the risk and in obtaining financing. A certified business appraiser can quickly determine your projected business income based on past income. Though this is easier to calculate when a business has regular income, it can also be estimated for irregular income. A business appraiser also has the knowledge to look at current market conditions and account for those potential disruptions in their calculations. This means when your industry is expected to do well for a period of time, the appraiser takes that into account.

As you can see, valuing a manufacturing company can provide great benefits and insights into how your business works and where it needs improvement. It also provides proof of value for any number of other purposes, from financing to insurance to sale value. If you need to get the valuation of a company, please feel free to contact us today to be paired with an experienced certified company valuation specialist. At Business Valuation Specialists, our job is making sure your business appraisal is completely accurate to your unique situation.