Business Valuation Blog | Understanding Buying / Selling a Company

If you have owned a business for a number of years and now need an appraisal to sell the company, apply for financial assistance, or bring in new investors, you will need to have reliable financial documentation that provides historical performance details.

The most common records you will need are income statements, balance sheets, and tax filing records. You can provide further information by responding to a series of typical questions the valuation professional will ask during the process, that will give additional perspective on how to view these documents and make discretionary adjustments to the income and expenses of the business.

The appraiser will ask for 3-5 years of these filings, and they should be developed by an outside accounting agency or internal company controller. If you find yourself in a position where these records are not current, or poorly documented, you will need to determine the best way to update them, otherwise, the appraiser may not be able to assist you.

One option is to hire a forensic accountant or bookkeeper who can go through all the business receipts and related paperwork in an effort to develop formal documents which can be utilized for the appraisal as well as support these transactions. A potential buyer, financial institution, or investor is not going to blindly give you funding if the historical performance of the company is not well-detailed and documented.

Keep in mind the appraisal firm you engage with cannot actively participate in the development of these documents since they need to remain independent and unbiased when estimating their value opinions. As a business owner, you will know far more than anyone about the previous performance of the company as well as have access to the records needed to put these documents together. Whether you decide to take this project on yourself or work with an outside agency or internal employee, your direct involvement in the process will be critical.

Regardless of your immediate desire to put the business on the market, or look for new capital funding alternatives, take the time now to review your business records and determine if they are accurate and up to date. Even if they are, take further steps to organize a file to consolidate and provide easy access to, all the historical financial records of the company so that when the time comes, you will be prepared to move forward.

If you are unsure of the steps needed to complete this effort, contact a certified accountant or appraiser who can discuss the process further and give you informal advice that gets you on the right track.

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.