Business Valuation Blog | Understanding Buying / Selling a Company

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.

When you're considering having business appraisals performed on your business, did you consider what kind of training they go through to become certified? A certified business appraiser has gone through a long process of gaining experience in the field, studying valuation practices and standards and taking classes on ethics and appraising particular facets of an industry. Because of these experiences and processes, they can provide extremely accurate assessments of your company's value. Here is some insight into the training practices and certification of business appraisal specialists.

Typical Qualifications, Training and Certification Process

Most programs that provide certification and accreditation for business valuation require a bachelor's degree or other experience. Membership in the organization chosen for certification is typically a requirement, often requiring reference letters or similar documentation prior to acceptance into the organization. The programs usually require some amount of work experience, with a few of them offering multiple levels of accreditation based on how many years of experience the individual appraiser has worked in the field. The appraiser will typically go through a certain amount of training, in the form of independent study, courses through the organization or classes offered through a third party. There is typically a certification process that involves peer review of a portfolio of business valuations that the appraiser seeking certification assembles. Following certification, there is usually a continuing education and membership requirement to keep the certification up to date.

Major Appraisal Accreditation Organizations

American Society of Appraisers (ASA)

The ASA has two levels of accreditation, the Accredited Member (AM) for those with two to five years of experience in the industry and the Accredited Senior Appraiser (also ASA) for an appraiser with over five years of experience. It's one of the longer-running certification programs in the country, started in 1981, and is one of the most highly-recognized programs in business valuation.

American Institute of Certified Public Accountants (AICPA)

A relative newcomer to the business valuation accreditation industry, the AICPA has a certification for business valuation specialists, the Accredited in Business Valuation designation (ABV). In existence since 1997, the certification requires that the company appraiser be a certified public accountant (CPA) before starting the process. Combined with the rigorous educational requirements and the more relaxed experience requirements which works well for a CPA who does business valuations on the side.

National Association of Business Certified Valuation Analysts (NACVA)

The NACVA has two different programs available for business appraisal certification, a Certified Valuation Analyst (CVA) and an Accredited Valuation Analyst (AVA) designation. The CVA certification was started in 1991, requiring a business degree or valid CPA license, provide documentation and references that demonstrate their experience and has options for alternatives to several of their requirements. 

Institute of Business Appraisers (IBA)

As the oldest valuation certification program, the IBA Certified Business Appraiser (CBA) program is fairly standardized at this point. In existence since 1978, the program is fairly clearly laid out, consisting of a fairly standard assortment of classes, business appraisal reports, membership in the organization and exams. The program does offer fast-track options for those with other designations, making it easier for professionals to add to their repertoire more quickly.

With all the work that goes into becoming a certified business appraiser, it's easy to see why the business valuations they produce are so highly valued in financial, legal and insurance circles.

To really be successful in business, you need to use strategic planning. But how can you figure out which areas to focus on? Do you know where your business is strong and where it is weak? Smart entrepreneurs and managers know that to create a successful business strategy, you need to know all the facts about the business. One of the easier ways to accomplish this is by having a company valuation performed. The valuation of a company provides you with important insights so you can create a business strategy that builds on your strengths and addresses your weaknesses. Here's how:

How to Use Business Valuations in Strategic Planning to Succeed

A Detailed Company View

How does your company compare to others in the industry? When you run a business on a daily basis, it can be hard to see the forest for the trees. A company appraisal gives you an outsider's view of your business performance. This insight allows you to gain knowledge of which processes are working in which areas and which processes need some serious overhauls to remain successful.

Helps Prevent Unnecessary Risk

Another area where a company valuation creates detailed insight is in risk management. If you made a business decision a few years ago that was wildly successful, how do you know that the same strategy would work today? Has the market changed? Have your competitors added features that leave your products or services in the dust? By knowing how your company stacks up against others, you can ensure that you're not taking a serious risk to your business in the process.

Allows You to Make Informed Decisions

When you have an up to date business valuation, you're able to make better business decisions based on solid facts. Why? Businesses are often perceived by those on the inside as being more or less productive and successful than an independent party, such as a business valuation specialist. You may be basing your business value on the simple value of the assets, which doesn't take into account business income projections. You could be figuring the valuation of your business on a recent sale of a similar business in your area, while your company has a less productive location or significant differences. These can lead to hesitation in planning or overconfidence in your business' value.

An Accurate Statement of Business Value

Business owner's often throw around multiples that they hear at the golf club that their buddy's business sold for.  His business sold for 10x so mine should be worth that as well.  Was that 10x revenue? 10x net income? 10x EBITDA? 10x Seller's Discretionary Earnings?  You could be comparing apples and oranges and in the process shoot yourself in the foot when you turn down what is later found out to be an above market offer for your business.

When you use strategic planning, your business will do well, but by using business appraisals as part of the process, you can make informed decisions that benefit your company greatly. If you're ready to start planning your business strategy, it's important to have a business appraisal performed as part of the process. If you're not currently working with a certified business appraiser, please feel to contact us today to be connected with one of our experienced, certified business valuation specialists.