Business Valuation Blog | Understanding Buying / Selling a Company

If you are a business owner who manages multiple product or service lines, you may be structured as a consolidated company with multiple divisions. These affiliated or subsidiary operations roll up into the primary business for accounting purposes, which facilitates the requirements you have for tax and other reporting purposes.

When it comes time to consider appraising any or all of these businesses, you will want to discuss the level of detail and depth you need to take to accomplish the task, while keeping in mind the time and cost associated with the valuation effort.

Let’s look at two scenarios for your business, which in this example consists of three divisions, a primary LLC company, and two dba operations. You file consolidated taxes and prepare one balance sheet and income statement as an S Corp under the LLC while keeping unaudited separate books for each of the three operations.

In the first scenario, you are considering selling off one of the two affiliates and need an appraisal of that component of your business only. If you don’t have detailed financial statements separating each entity, then you will need to advise your appraiser and they can determine the available options. One might be to value the main LLC company while taking the results and breaking them down internally and applying a percentage of the total to estimate the value of the subsidiary. This may not be 100% reliable given the potential inaccuracy of your assumptions when making these adjustments. A better option may be to create a separate income statement and balance sheet for the subsidiary that the appraiser can reasonably rely on and have them value both the LLC and the affiliate or just the affiliate, depending on your needs.

Under the second scenario, you are looking for new investment either through equity infusion or debt financing and the investor or bank needs to review the financial strength of the entire operation. In this instance you can likely just have the appraiser value the consolidated business, relying on the reported financials while holding general discussions with the third parties as to the breakdown of the overall company.

Regardless of the potential situation you find yourself in, it is always a good idea to keep separate books for each division either formally with the support of your accountant, or through your own internal organized bookkeeping process. This will enable you to have the financial data available when needed for the appraiser who can best understand the overall business and allow them to break down the value of your subsidiaries in a reliable and supportable way.

As a business owner, no one knows more about your company, its operational history, and where it’s headed going forward. When you determine the need for an independent appraisal, the ability to work in tandem with the company you choose to engage with will benefit all parties involved.

There are very likely areas within your financial statements you can elaborate on to paint a more accurate picture than simply what the numbers show. In addition, your experience with the markets and industry you operate in will provide added perspective to the appraiser when they research the competition and comparable businesses during the course of the analysis.

Review overhead and expenses to determine if any are discretionary and adjustable to how you might otherwise operate on a leaner budget. Look at what might be considered “one-off” costs in certain years that can be backed out of annual cash flow levels and review special compensation packages to you and your employees which might not be relevant to a potential buyer. You may be claiming a lower net income figure on your taxes each year because of these discretionary expenses. That is a common strategy for business owners each year as they best position themselves before year-end filing.

The goal is to create a normalized, realistic year-to-year snapshot that shows how the business can most efficiently and effectively run without consideration for added unnecessary benefits you may have created over the years for you and your staff.

When a small business changes hands, the new owner will have their own set of circumstances to consider and will often look at the most economical model to begin their operation until they too can create these added benefits once they become successful in the coming years.

From a market and industry perspective, advise the appraiser of local competition and similar businesses that may be public or available enough to make reasonable comparisons. Discuss future areas of growth you may have implemented but have yet to fully realize the added revenue streams.

It’s important to add these levels of perspective where you can so the appraiser better understands your business beyond the standard documentation that they are provided with by you or your financial advisors. The more the appraiser knows about your personal experiences as they relate to the history of your company and its operation, the more accurate the valuation results will be.

After owning and running your company these past years, you have achieved many of the goals you once had to create a successful enterprise. The day has now arrived when you decide it’s time to move on to retire or create another opportunity with a different business. If you don’t have a desire or the ability to sell to your employees or hand the reins over to family members, the option to market your business in the public arena is a viable one.

The upside to an open market sale is that you can potentially realize top dollar from a competitor or new entrant and walk away from the deal with 100% of the proceeds in your pocket. However, there are a few roadblocks to consider that may get in the way of a smooth transaction. You need to manage these carefully while not losing sight of the overall end game of a successful sale. Here are a few things to consider:

Should You Engage with a Business Broker?

No one knows more about your company’s history and future growth potential than you do, however, selling your company requires a lot of time to prepare and market on your own. Selling companies is a business that requires certain experience and expertise you may not have, and the additional time to handle this without assistance can be overwhelming.

Consider researching business brokers who are familiar with your industry and company model, while gathering the internal data they will need to understand how best to sell your business. If you find someone you believe can greatly increase the odds of a successful sale, you can formally engage them to represent you in the open market. Having a reputable business broker working for you can give you a layer of independence and added credibility while potentially reducing the time it takes to realize a sale.

Obtain a Formal Company Appraisal

Another level of unbiased independence can be gained when you have a business appraisal completed by a certified professional. This step should be completed in the early stages of marketing so you can present the report to potential buyers and your broker if you’ve engaged with one.

In summary, selling your business in the open market is an exciting opportunity that comes with challenges that are best faced with a level of independent support that maximizes the chances of a successful outcome. Consider all the options you have carefully to determine what will work best for you.

Acquiring a formal certification or accreditation is critical in the valuation profession and typically requires a few years of hands-on experience and the successful completion of several educational courses to gain the initial recognized title. Once acquired, there is usually a renewal process every 3-5 years depending on the organization providing the designations, whereby a minimum of 20 annual continuing education hours are needed to maintain and extend it beyond the initial period.

Staying current on topics such as ethics, report writing requirements, industry/market developments, tax laws, and economic fluctuations is important so that appraisers can continually be aware of developments in these areas in order to provide ongoing credible valuation work.

There are a few different ways valuation professionals can accomplish these continuing education requirements. The most common is attending courses and seminars provided by their primary recognized associations, such as the American Society of Appraisers (ASA), the National Association of Certified Valuators and Analysts (NACVA), the Appraisal Institute, or the Appraisal Association of America.

Prior to the development of online course offerings, appraisers could only attend courses in person, which was more time-consuming and costly. Virtual classes are generally less expensive and allow individuals more flexibility in terms of scheduling. Some of these associations also have local chapters that meet throughout the year and create learning opportunities on a more personalized level.

Another option is to attend conferences, trade shows, and seminars provided by third-party organizations that specialize in areas such as finance, tax, accounting, economics, and specific business industries that the appraisers might focus on. Over the last few years, many of these events are now offered both in person and virtually.

The appraiser is required to track, log and report their hours to the sponsor organizations who will formally provide the recertification or reaccreditation once completed. These steps are crucial to the long-term credibility and continuing validation of both the individual appraisers and the valuation industry as a whole.

When you are seeking the services of an appraiser to value your business, ask them if they have maintained their continuing education requirements that pertain to their specific designation and their affiliated organization.

As a business owner, there will come a time when you begin to consider selling the company, hopefully after years of growth and prosperity. Whether you are eyeing retirement or thinking of shifting your career path, you will need to determine the ideal exit strategy for the company and explore the options available to you. Here are a few to think about:

Internal Sale to Key Employees

You have likely built lasting relationships with some of your top personnel who have been loyal over the years and helped you build the business up. An internal company sale to employees who are ready to take on the additional responsibilities of ownership will avoid the extended time and risks of an open market transaction. This will also instill confidence in all your workers that you intend to keep things as consistent as possible during this transition and in the years to come.

The downside is that you may need to develop an affordable seller financing package that allows the employees to pay you over an extended period of time.

Engage with a Business Broker

You should be able to research the market and find a couple of business brokers who specialize in selling companies to other third parties in your industry. This process will probably involve considerable time and expense, however, the end result may be worth it. Make sure you conduct a thorough background check and interview process before committing to a company as you will be heavily reliant on their ability to successfully complete a sale which may take several months or even a year or more to finalize.

Develop your own Marketing Plan and Sale Strategy

If you have a lot of industry contacts and feel confident that you can manage the process independently, consider taking the time to develop a strategy to market your business solo. If you strongly believe you have the knowledge and experience, as well as the time, and understand the risks involved in this kind of venture, you might be best served to sell the company yourself, relying on the fact that no one knows your business better than you.

You should have your accountant, attorney, and any other key advisors involved in the process to mitigate risk and avoid miscommunicating information to potential buyers. This option has the most upside potential but higher downside concerns given the independent nature of the transaction.

In summary, this decision will be one of the most important ones in your life so take plenty of time to consider your options and seek advice as needed.

Most everyone is familiar with the commonly cited statistic that 50% of all marriages end in divorce. Unfortunately, this estimate is essentially factual, with around 40% of first marriages and 60-70% of second and third marriages making up that average figure. Experts will also tell you that the last three years of hardships (we all know which ones I am referring to) have driven these numbers up further and will continue to rise in 2023.

If one or both of the partners in a divorce owns all or part of a business, the value of the enterprise and its underlying assets will likely become subject to the overall divorce settlement. A dispute as to the assessment of the fair market value of the business is commonly a factor in many divorce cases. The best way to resolve any dispute, ideally in an amicable fashion, is to engage with a certified business appraiser, who can provide an independent value based on reviewing the company history, analyzing financial data, researching the market, and understanding the assets associated with the operation.

Divorce attorneys will often be the representatives who suggest this approach during the proceedings and will work directly with the appraiser to facilitate the collection of data from either or both parties involved. This process can get bogged down for any number of reasons, and the judge or arbitration representatives involved should look to expedite the process with the legal means available to compel the availability of the information needed for the appraiser to complete the appraisal.

Without cooperation on both sides to work through the valuation issues together, the roadblocks to settling these cases can pile up, andthe divorce terms may ultimately be decided by the courts, who have no personal stake in the business or the overall case. The courts will look to rely on any experts involved in assessing value and if both parties engage separate appraisers, it could lead to deposition or trial testimony to ultimately determine value.

It's logical to assume it would be ideal for both parties if these decisions were made amicably and mutually however, the reality is that many divorce settlements become very difficult to settle due to significant differences of opinion, making the ability to work through the process unattainable without the assistance of independent third parties. When it comes to maximizing your chances of arriving at a fair settlement of business value involved in a divorce, seek out an unbiased experienced appraiser to work through the issues with you.

As a majority owner or equal partner in your business, there may come a time when you need to settle a buyout request from another partner or investor who is opting out of their ownership interest. When this occurs, there are a few things to focus on that will impact the agreement and it is common to look for guidance and assistance, including the engagement of a certified valuation professional.

Does your company have an internally developed buy-in/buyout or another type of operating agreement that lays the groundwork for assessing value when these situations occur? Proactively handling these eventualities is never a bad idea and is quite common for rapidly growing businesses that are frequently looking for new investors to manage capital funding requirements and add value.

Is the partner or minority shareholder a key contributor to annual revenue? If so, is there a non-compete agreement in place to buffer the effects of this departure in the short term? If not, should the company be valued with the anticipated losses in sales or is there a mutually agreeable arrangement to replace the partner and offset this reduction?

If the investor is buying out of a minority interest, should discounts be applied to reflect the value of his or her shares in relation to majority ownership? This topic is commonly debated in valuation assignments where the shareholder may not have the same level of control as a larger investor, or it would be more difficult to attract a replacement given the lesser interest.

Given these variables may create a divide between the parties on the ultimate price to be paid with partner buyouts, a dispute may ensue which may drag out the process and even lead to litigation between the parties. Engaging with a certified professional business appraiser will provide an independent, unbiased assessment of value which will hopefully facilitate a fair settlement.

In any case, when a minority owner or partner opts to buy out, it may warrant the need to formally update the value of the business and associated shares so you and any remaining investors can better understand the overall current status of the company. The benefits of having an independent appraisal of your business and the underlying assets can go well beyond these immediate concerns such as assisting with future growth plans and reviewing your tax and accounting requirements.

When business appraisers value small to mid-size companies, the most common documents that are reviewed will include financial statements going back 3-5 years that track the company’s performance over its most recent history. This data should be indicative of past operational performance; however, the appraiser needs to carefully review what they see on paper with the business owner to fully understand the larger picture and potentially make adjustments in areas such as discretionary/variable expenses and officers’ compensation. This ultimately creates a true picture of the company’s assets, cash flows, and profitability.

As a business owner, this same type of practice should be undertaken internally every year or two so you can carefully review all aspects of the operation and determine where consistent trends appear while uncovering areas that may be more volatile. This way, you can make adjustments to correct deficiencies and further capitalize on the more successful sectors, to create an optimal working environment for the future.

For many business owners, a 5-10% improvement in areas such as market share, gross revenues, costs, and profitability can make a meaningful difference in overall performance. It might free up working capital to invest in sorely needed improvements to your office equipment or make the difference that enables you to hire a new employee to assist with a slow-moving operational area or to build up the sales force. You may determine this adjustment could make you appear more proactive and successful to a new investor or partner looking to come on board in the coming year.

Whatever the desired result, getting into the habit of digging deep into your company’s year-to-year performance to understand better what has been working well and what might need tweaking, is a great practice to initiate, especially for owners looking to get that extra edge over their competitors. This is one example that can create an opportunity to be the best at what you do and allow for continued growth and success.

A few times each year, I like to discuss future planning strategies and long-term growth with business owners, and how they look ahead while keeping one eye on past successes and failures. Oftentimes, forward-thinking involves the potential for expanding the company, however, what if your firm is at the point where everything is running smoothly with revenues and net income right where they should be?

There may come a point when forecasting over the next few years involves simply keeping the structure of the company the same while making minor tweaks to refine existing strategies that will potentially improve margins. Is this an example of resting on your laurels or has all the hard work in the past finally reached a point where major changes are not economically feasible? Perhaps you are even risk-averse to future growth since diminishing returns would be a likely outcome.

This type of strategy may be more common than you think. Being a successful business owner does not always equate to having the compulsion to constantly reinvent the wheel. In fact, many experienced entrepreneurs in niche markets understand that once you have reached a certain level of market share, you have essentially positioned the company at the ideal point where current revenues, overhead, and profits are at optimal levels.

Depending on your overall personality, current drive, and where you are in your career path, it may be the perfect time to enjoy the fact that the business is exactly where you planned it to be years ago and consider whether you want to take a breath while reaping the rewards or move onto another opportunity. You have options in front of you, even though they may not be the same ones that got you where you are today.

Looking inward and reviewing how best to maximize the benefits of your existing employees and client relationships while fine-tuning a business that now needs only minimal maintenance are things you can do regularly. After all the challenges you’ve faced and past successes you accomplished, that is a great way to keep your company optimized.

As a business valuation professional, oftentimes your work effort goes beyond the preparation of an appraisal report. Business owners may engage with a more comprehensive advisory team to accomplish their goals, including tax, accounting, and legal representatives. With the potential threat of audits and legal disputes involved with certain ongoing project requirements, this team of experts may all have a role in the successful outcome for your client.

As the valuation professional, ensure that you include a clear delineation of the scope of work and fees associated with preparing and delivering the appraisal report and any follow-up consulting work which may arise as the transactions or cases develop. One option to accomplish this is to have a fixed cost for your initial report and hourly rates specified for any work pertaining to the continuing efforts related to the larger advisory team.

If you know the valuation work will be included as part of an ongoing or potential audit, or if litigation consulting and testimony may be involved, discuss these issues with the client and other members of the advisory team, so you can gauge the depth of additional time involved and look to better plan the future scope of work.

Ensure you document all your discussions, both by phone and email, while tracking your time on a weekly or monthly basis so you can support the additional costs involved with the prolongation of the appraisal engagement.

Look to these kinds of projects as an excellent tool to gain additional experience while working within a team environment where a common goal is to bring value added to your client’s transaction or legal case. Better understand the larger perspective of the matter so you can best prepare and potentially bring thoughtful suggestions to the table which relate to your role in the scope of work effort.

The most successful service providers understand how to look outside of their day-to-day analysis and report responsibilities and develop expanded opportunities in a business consulting and support environment. In a professional world where disputes are common and must eventually be ironed out, you can leverage your expertise to involve yourself in these cases and become a more diversified appraisal firm.