Business Valuation Blog | Understanding Buying / Selling a Company

Business appraisers typically gather a lot of historical financial data when working with their clients on valuation assignments. They review income statements and balance sheets while looking at the market and industry data that all help shape their conclusions. Going back five or more years is not uncommon, while at the same time discussing reasonable future expectations within the confines of the current company profile.

On occasion, however, an appraiser may engage with a new “startup” or a company that’s been in development for years with little to no income that projects a formidable 5-year forecast of significantly higher revenues. How should that appraiser approach the valuation effort without ignoring historic performance or the external data they usually rely on when looking at more traditional businesses?

The answer is largely dependent on the credibility of the forecasted revenues and their client’s underlying reasoning behind these estimated projections. Here are a few questions to ask both the client and yourself as you work through the analysis:

Is the business unique in any way to its competitors or to comparable businesses in the market?

If yes, then it makes sense to focus on those areas to support the projections that might otherwise appear unreasonable on the surface. If the answer is no, then use the available market to create some checks and balances with the forecasted figures.

Has there been any tangible infrastructure developed within the company that sets the stage for realistic expectations of the longer-term forecasted growth?

It is common with a 5-year forecasted projection to aggressively estimate much higher revenues in the latter half of this period. What has been accomplished today that might further enable the appraiser to agree the longer-term outlook is not overreaching?

What degree of hypothetical or extraordinary assumptions is being made to support the aggressive growth?

Is the client making one too many assumptions about the internal structure of the company or making future market predictions that just don’t add up to a reasonable expectation?

Overall, there will be additional challenges with these valuation projects where reliance on heavily forecasted projections far outweigh historic data. As an appraiser, don’t be afraid to question the client if you are not comfortable with the overall picture they are presenting. Have them provide a clear, sensible outline that supports the aggressive forecasts, and ensure you make statements in your report which show the level of reliance you put on the assumptions and conditions. After all, it is your work that will potentially be relied upon by other parties who may be investing in the future of your client’s company.

As a small business owner, I receive dozens of email “come-ons” every month advising me of wonderful new marketing, accounting, hiring practice methodologies, or related services that are supposed to increase my company’s effectiveness and efficiencies, leading to a healthier bottom line.

Personally, I have never followed up with any of these places, however, that doesn’t mean some may provide a useful service for my company. I just happen to be an old-school manager who has people I trust handling these kinds of things for me internally.

As a business owner, you should do what works best for you and your business. Have you been mired in the same processes for years without thinking of new ways to improve your business model? Are you a new start-up, ready to utilize the latest technologies, products, and services available to enter the market running at top speed?

In either case and for most business owners who are somewhere in between these two scenarios, you should keep an open mind about process improvements while continuing to rely on your own experience and expertise, as well as those of your coworkers. If you don’t have certain areas well covered at the moment, such as social media marketing, website development, or accounting software, it may be a good idea to research and engage reliable third-party companies who provide these services or look to hire those with the skill sets required to handle these key sectors of your business.

Consider if your goal is a long-term permanent improvement to your company’s capabilities or a shorter-term fix that can be solved with the help of an outside consultant. Depending on the industry you operate in, products such as accounting, valuation, and inventory management software, might be useful to consider acquiring. Other areas that are critical include marketing, website design, and search engine optimization.

Capitalizing on your past success and old-school work ethic, while staying current with the latest developments and capabilities in the business marketplace, will provide the best opportunity to be successful as you move forward with your small business. Take the time to review the strengths and weaknesses of the key components of your company’s current profile, and look to create a plan that will put you in the best position to succeed today and in the future.

Retirement can mean many different things to people who come from a multitude of family and career backgrounds. If yours involves owning a small business, there are some consistent mindsets and potential options ahead that are in tune with other proprietors nearing this phase of life. Here are a few to think about:

Keep it in the Family

If you’ve been fortunate enough to have one or more family members working with you over the years, there is the opportunity to sell the business while keeping it close to home. Consider who has the best makeup to take over the company, whether it be a sibling, child, or another relative who has been with you and knows the business inside and out.

Train Existing or New Employees For Replacement

One or more existing employees may have an interest in acquiring the business. If so, it may make sense to consider one or more of them under a buyout option. You may need to finance the acquisition in this case, either through a fixed loan or a percentage of the monthly revenue. If no one is senior enough to take over, consider looking outside for seasoned talent who can quickly learn the ropes and assume the leadership role.

Hire a Business Consultant for an Open Market Sale

There are experienced consultants who know your industry and could take a lot of the pressure off you while marketing your business to competitors and those looking to enter the market. This process may take several months, however, you can put the terms in place you’re comfortable with and negotiate a fair price with the support of reliable third parties.

Part-Time Transitioning

In any of these possible scenarios, it might make sense to consider a phase-out plan over a couple of years or so, in which you remain actively involved in the day-to-day operations on a part-time basis to ensure a smooth ownership transition, especially if you’re involved in the financing of the sale. It’s difficult for many small business owners to say goodbye to their company and the people they have worked with, so this might be a nice way to manage the process.

From a personal perspective, we all have stages in our life where we strive to become the best version of ourselves, by improving our overall lifestyle in areas such as health, career, and relationships. Small business owners should take a similar look at their company and ask the same questions. Is my operation the best version of itself or are there ways to significantly improve it in the coming years?

You know your business better than anyone, and like your own life, you can dig deep to break down the areas that can be updated, enhanced, and made more efficient with some introspection, that can be converted into new processes that ultimately increase revenue and net profits.

Some examples to consider:

Overhead Costs

Whether it’s a fixed or variable expense, what areas of your monthly overhead costs can be better controlled without sacrificing quality and efficiencies? Possibly cutting back on expensive trade shows or business meetings where travel costs are high, especially in today’s market. Review everything, from current subscriptions to the employee health care plan for ways in which you might be able to save money while keeping their benefits at the same levels.

Capital Resources

Are their less costly financing options available in the market to restructure your current debt? Would a fresh infusion of working capital allow you to invest in new growth opportunities?

Updating Your Fixed Assets & Maintenance Programs

Is your plant & equipment still functioning at the same levels as when they were originally acquired? Are you spending too much on maintenance as a result of poor operating efficiencies?

Employee Performance Levels

Are you getting the same commitment and output from your staff since the days when they were first hired? Is there room to consider adding personnel in areas that would have a direct payoff to increased revenue or cost savings? Would additional incentives lead to more productivity and increased revenue?

Market Expansion

Are there unexplored markets that complement your key business focus that could lead to additional clients and services? Are you happy with the current market share for the sectors you are entrenched in every day?

These are just a few of the areas to consider when looking to create a new and improved version of your business. Take a deep dive with the knowledge and experience you’ve developed over the years to make improvements and continue to have success.

Small business owners who have spent the time going through the initial stages of becoming established and developing a steady revenue stream under their existing plan may decide it’s time to consider what it will take to expand and grow the company to the next level.

Depending on the type of business you operate, your competition, and available resources, your growth options will vary. Here are a few to consider that might assist in your expansion efforts.

Marketing Effectiveness

Marketing is the biggest day-to-day challenge for many small business owners. In today’s digital world, a lot of focus has been on upgrading the effectiveness of your SEO (Search Engine Optimization), website appeal, and social media activity.

For others, old-school word of mouth and physical networking such as industry conference presence is something to consider investing more resources into.

Expanded Client Services

For those companies who rely on a handful of clients to drive their business, look to provide additional services such as consulting or new product development. What complementary services are you capable of providing that will open up new revenue sources?

Sales Force

Consider bringing in new talent with experience and new client relationships that can immediately impact growth. It may be more costly in the short term but can soon reap the rewards of permanently expanded market share.

Existing Staff Effectiveness

For those employees who have been with you since day one, consider how they might take on updated, expanded roles that can lead to efficiencies in all areas of your business. You may be pleasantly surprised how much your existing staff is capable of doing, especially when you add plans for incentivizing the extra work effort.

Growing your business to the next level can be a new and exciting objective that can reinvigorate you and your team’s investment in the company. Take a hard look at how you achieved all that you’ve done up to now, and what areas of the company can improve and expand, to provide the best chance of getting you there.

After years of creating, developing, and growing your small business there will ultimately come a time when you determine the next best course of action is to sell, whether that be in the open market or in a private transaction between employees, family members, or current investors. In all of these potential scenarios, there are a few things to include in the early stages which will give you the best opportunity for a successful outcome. Here are some of the more critical steps to consider:

Accounting Records and Client Files

Work with your bookkeeper, accountant, and/or controller to ensure all internal documentation is current and organized. These records will need to be accurate, easy to understand, and accessible to both you and potential buyers during all phases of the sale process.

Obtain an Independent Valuation

There are sure to be differing opinions on the overall value of your business. Subjectivity and personal feelings can’t be a factor in determining a reasonable and fair assessment. Look to engage with a certified and accredited appraiser who can work with you and your support team to develop a credible, defendable valuation of the company. The earlier you engage in this effort, the more control you will have in the process.

Hiring a Consultant or Business Broker

If the sale is on a private level with the buyers already identified, such as in the case of an employee purchase or family generational transfer, you will want to consider working with an independent business consultant who is familiar with these types of transactions. Try to avoid hiring someone you know personally or through other business dealings as it can create doubt as to their objectivity.

If you are going out into the open market in search of potential buyers, you should think about working with a business broker who can guide you through the process and take on much of the workflow involved in getting a sale completed. They will act as your exclusive representative and offer benefits in the way of identifying the right groups of purchasers and negotiating fairly on your behalf.

Make sure they have experience in your markets and industry and have a reasonable commission plan that isn’t too expensive. Don’t hesitate to research typical broker plans and interview a few different companies before you decide who to engage.

In summary, regardless of whether your business is being sold at a private or public level, the process can take several months to complete, therefore, the more you accomplish and set up in the first weeks will lead to a more efficient timeline and effective conclusion. All the years of hard work you’ve put in getting to this stage will reap its rewards with a sound game plan to successfully sell your small business.

One of the biggest challenges facing small businesses today is the ability to attract and retain key employees over the long term. Due to the COVID pandemic, employment practices have quickly evolved into a more challenging arena, especially with the next generation, of educated and talented individuals available in the workplace today.

Long-term loyalty with both your existing staff and new hires comes down not only to monetary compensation but will include other perks and incentives not considered in the past. Here are some topics to consider if you plan on hiring new employees or if you want to ensure current staff will remain in place in the foreseeable future.

Experience Levels

5+ years of experience is no longer the benchmark for potentially promoting from within or hiring new employees at an advanced level. As a business owner, you may need to consider 2 years, or even less in some cases, as the amount of experience candidates have under their belt.

Remote Working Environments

A lot of companies are seeing sizeable amounts of employee pushback when it comes to reassessing “in office” requirements over the past two years. Even hybrid models such as 2-3 days a week back within a larger group environment have been rebuffed by a lot of new and existing personnel.

You may need to consider easing these requests on a case-by-case basis and weigh the pros and cons of maintaining a flexible home or remote office option. Much of the younger generation of talent has quickly learned to excel in this format without losing the group office team concept, and for the youngest of these workers, this may be the only style they’ve known.

Overall Compensation

Planning for increased salaries and overhead on a year-to-year basis is becoming more commonplace today as entry and mid-level positions are necessitating higher pay levels in numerous industries. The minimum wage in many states continues to scale upwards making employee compensation an even bigger challenge. Consider including additional perks such as signing bonuses, profit sharing, 401K, and other benefits to stay ahead of the competition and engage the best talent available.

In summary, these are just a few of the challenges facing owners and company managers in today’s business environment. Staying one step ahead of the game by being innovative in your promotional and hiring policies will allow you to maintain key employees that are critical to short and long-term success.

One of the biggest challenges for many small business owners is effective marketing which ultimately drives sales volume. Whether you’re a local company that tends to rely on word-of-mouth referrals or a nationwide operation looking to grow, one of the most effective tools available to you is your online presence.

There was a time when folks used to look in the newspaper or phonebook to locate what they were looking for. Those days are long gone. Potential new clients who want to utilize your service or purchase the type of goods you provide, will almost always turn to an online search engine first and type in a phrase or handful of keywords to describe what they need to find. For this reason, every small business today needs an effective and attractive online presence, where new content is being actively posted and updated, to maximize the benefits of this powerful marketing tool.

Consider engaging with a company that combines a web-building content management system (“CMS”) with a customer relationship management (CRM) system. Doing so can be very beneficial for a small business because you can aggregate web design, development, data tracking, lead generation, eCommerce functionality, and even social media marketing efforts saving you time and money in the long run. Many have the ability to add customized code and APIs so you can make your brand stand out. The best ones offer robust reporting abilities giving you a real-time look at your online performance across platforms and allowing you to make adjustments quickly and easily.

Look internally to your employees to determine if any may have the skills required to assist in developing or upgrading your website using a CMS or can oversee and manage the data coming in from a CRM. Keeping these functions in-house will save you money and afford you more control in the long run. If you need to engage an external business be aware the cost of using outside services can be significant. Budgeting and planning will be vital throughout the process as well as gleaning a clear understanding of the overall cost vs. annual revenue growth projections.

There are many key decisions small business owners make every day. When it comes to creating the optimal platform to maximize sales, the development of an attractive, effective online digital presence combined with a good quality CRM can be one of the most important ones, offering long-term growth opportunities that fit your goals and allow you to make the best investment decisions impacting the future success of your business.

The SBA (Small Business Administration) loan programs have become even more prominent over the past few years as companies continue to recover from the pandemic and battle continuing economic and sustainability issues. For those who have thrived in spite of these challenges, the need for favorable loan conditions to handle growth needs, such as working capital access, is critical to future success.

While working with your primary financial institution, who should act as the intermediary for your SBA loan application, make sure you understand all of the approval requirements, including the need to obtain appraisals. Depending on the type of company you own, the size of the loan request, and available collateral such as real property, equipment, and liquidity (cash and receivables), you may need to engage with independent appraisers to provide the SBA with accredited, certified valuation reports for any or all of these components to your business.

During the application process with your lending institution, gain an understanding of these requirements early on as it will take time to find the best appraisers for the job. Turnaround time, responsiveness, and flexibility should all be factors to consider when engaging a valuation expert. Don’t sacrifice any of these variables based on a cheaper option, as the decision may come back to bite you. The valuation results may be poorly determined, the process may drag out interminably, and the SBA could even deny the validity of the reports if you engage with an inexperienced, unprofessional appraiser.

The SBA may require only a tangible asset appraisal, for your building, land, and equipment. Other scenarios would reveal a need for an overall business valuation, which would consider all the assets of the company, as well as an income and market analysis.

In either case, the more prepared you are at the outset of the process, the better chance of a satisfactory result and efficient approval process. Obtaining the capital you need at the right time can save you thousands of dollars in both the short and long term, while the application and approval process can be overwhelming. The best appraisers understand all this and will work with you to ensure they facilitate their role in the process, as opposed to hindering it. Don’t forget to rely as much as possible on your direct lender, as they may be able to recommend the right professionals to work with.

In the small business arena, where the vast majority of US companies compete, there always seem to be new challenges and obstacles confronting many owners and employers each year. This couldn’t be any more evident than what we’ve all experienced over the last 2+ years as COVID-19, supply chain crises, inflation, shifting energy market policies, the Russia/Ukraine War, investment market downturns, and unreliable messaging have all impacted small businesses in one way or another.

Through all these developments, it seems small businesses are the ones left to fend for themselves while large corporations leverage these issues for their own gains. It might be easy to listen to all the noise and share in the complaining, however, wouldn’t it be more advantageous to focus on your company’s specific challenges, while carving out new paths to stay profitable and find growth opportunities while others are being overly reactive?

While all these compounded issues have created very significant challenges for many small business owners, many have faced these types of hurdles in the past, whether from revenue and cash flow reduction, vendor price increases, delivery delays, or employee and client retention. The most successful small business owners are continuously looking for ways to refine and improve their business practices, even in the best of times. Being proactive on a day-to-day basis while continually posing relevant questions to yourself, your peers and employees will allow you to stay ahead of the curve and be prepared when these challenging issues arise.

Don’t be afraid to take risks and invest in areas where you see new opportunities for growth or greater operational efficiencies can be developed. Challenge the rest of your team to do the same and humbly realize the more support you have from loyal employees who can assist in these efforts, the better.

Consider being a unicorn, and dare to make decisions that appear unconventional today, but could turn out to be revolutionary tomorrow. The less alike you are to the rest of your competition in certain value-added areas could easily have a positive effect on how clients view your products and services compared with those in your market. Improved communications, deliverable timelines, and customer service are just a few examples to consider.

These changes will likely create more demands on you as a business owner, as well as your employees, however, the eventual payoff can be critical in overcoming the sum total of the challenges faced as a result of the external forces affecting your business.