Business Valuation Blog | Understanding Buying / Selling a Company

When your business is within the retail sector, consumer confidence and market uncertainty can make all the difference in whether you are operating in the red or the black. But how do you adapt to changes in the market? One option to consider is a business valuation today so you can plan for the future, focus on your strengths and avoid the potential pitfalls of this industry. You can then adapt to changing market conditions and position your business to take advantage of the high points in the market while riding out the low ones.

Many people only consider obtaining a third-party business valuation when they are looking to buy or sell. The benefits gained during a retail store valuation now, regardless of your future plans, can provide you with valuable insights into your operation, and a better understanding of your overall assets and liabilities. This, in turn, gives you the tools you need to get your business through the difficult times while taking advantage of growth opportunities in the good times.

As an example, regardless of the timing, it is likely that your business has recently squeaked through an economic downturn as well as seasonal upswings in sales. Based on your experience, you would now like to consider growing your business by adding a new location or merging with a competitor that hasn't fared as well. In preparing to manage the due diligence process, you need to know what your business is worth, whether it's to secure the financing and investment you need, or to know where you stand in comparison to competitors. By learning this information, you can better negotiate the terms involved in the potential transaction.

The certified independent appraisal report you receive should have all information you need including a report on your market sector as a whole and its anticipated growth or loss in the upcoming years. A look at your competitors should also be included, detailing how they compare to you in the market. Your assets and liabilities are reviewed, giving you valuable insights into the areas you may need to upgrade or replace that are inefficient or even failing.

As a result, you may see innovative approaches to customer support that strengthens your business' overall stance in the market sector. The appraisal may even help you look at your online presence and level of digitization, as well as how that capability is expected to allow your business to expand into new markets.

In summary, you'll have the supporting documentation you need to get that loan for a new location opening or to improve and expand your existing business processes. You can make smart, informed decisions on what needs to change in your company to boost its performance and see where you should continue to invest for future growth. Obtaining a retail business appraisal from a certified experienced valuation firm is one of the best ways to gain these insights into your company which, in turn, will provide options that allow you to adapt to meet changing market demands.

Savvy business owners and executives know that obtaining independent updated valuations of their company is a vital part of maintaining a sound, overall financial picture. When your organization has branches all over the country, how do you ensure you're getting the same quality of service and reliability at all these locations if you are using a local appraisal firm? One solution is to consider using a national business valuation service, which provides your company with professional appraisers who have valued businesses in every state and understand the broader marketplace your businesses operate in.

How are these types of valuation firms different than local single location valuation companies? Let's find out:

What are National Business Valuation Services?

If your company has multiple locations, and an updated independent business appraisal is needed, it makes sense to have consistency in the quality of the work as well as the methodologies used to measure value. This ensures the firm providing the valuation is familiar with your industry across all regions of the country and can provide the same level of service while following consistent guidelines and procedures for all of your operations.

A national business valuation firm will assign one project manager to handle the entire workload, so you only have to communicate with a single person throughout the process. Their job is to handle the day-to-day details of obtaining the documentation needed from your business as well as managing any other appraisers involved in the valuation effort. This beats the alternative of potentially having to work with multiple companies or individuals while taking a chance that a local appraiser might not be qualified to manage a much larger project.

The end result is a reliable, supportable valuation completed by certified, experienced appraisers with a consistent methodology that provides your company with the information needed to understand your current and future needs as you evolve into the next stages of your business plan.

Business Valuation Specialists LLC is a national business valuation firm that has been providing appraisal services across the country since 2003. Our highly-trained, qualified appraisers are Certified Valuation Analysts (CVAs) through the National Association of Certified Valuators and Analysts. We are available anytime to help answer questions you may have about getting a quality business appraisal performed on your company.

Transferring ownership of the family business requires care and planning to ensure a smooth change of leadership. One frequently overlooked tool that can assist in the transitioning of the business to family members is a company valuation. Learn how getting the family business appraised can benefit all the relatives and related parties who work for the company.

Why You Should Obtain the Valuation Before Transferring Leadership

Imagine if you transferred the family business over based on a “ballpark” value thrown out by one or more of the current members involved. Older relatives who held leadership positions might be expecting a large payout. Others may have assumed the payout was certain and planned their retirement lifestyle on it. When the valuation of the company is not formally established by a certified independent appraiser when leadership transfers, the grounds might be set for a generational dispute if there is no real agreement or understanding of the true value.

If you engage the services of a business appraiser, the resulting analysis and report would act as an objective neutral framework for the company that would guide all the family members involved. While the appraised value might fall short or potentially be higher than the perceived value, the process of getting the business appraised will take some of the emotions out of the leadership transfer.

Once everyone understands the true worth of the company, you can allocate the fair market value by the number of shareholders, and provide the owners with an idea of their retirement income, and plan for the next steps with the transfer of the business.

The appraisal can also help manage expectations and allow the new leaders to chart a course forward with confidence that they have all the facts needed to succeed. Instead of causing strife, the change of leadership can now strengthen family unity.

Getting Family Business Appraisals for Tax Purposes

Not only is it important to have the company appraised from a personal perspective, but it is also necessary to do so for tax purposes. The IRS requires that businesses not subject to a special provision be valued at "fair market value" for federal tax purposes when the business is transferring family leadership. Fair market value denotes the price that a buyer, not related to the willing seller, would reasonably pay for the business. Since most company owners cannot objectively determine fair market value, a business appraisal will solve this requirement.

If the IRS were to ever examine the business transfer or audit company taxes, the appraisal can prove that the company's value was treated as "fair market" for the purposes of transfer.

If you sell the business to your relatives for less than fair market value, the new owners could be penalized with gift or estate taxes. Selling for fair market value is the best way to avoid this and ensure a smooth transfer of ownership.

Planning Your Business Appraisal

Now that you are aware of how a business appraisal can assist with the transfer of your family’s company, take action by finding a qualified appraiser. It is well worth the time spent to find an appraisal professional who understands your industry and your geographic locations, given that these two variables can directly affect the company's appraised value. A certified business appraiser will also have the experience and credentials needed to support their value conclusions.

Business Valuation Specialists can assist you in this process from beginning to end. We have the qualifications you are looking for and the experience you need to provide an accurate appraisal that will help you through the transition process.

When you want to sell your software company or need a better understanding of the value for business you have worked so hard to build, you need to consider an appraisal. The software industry differs from most others, so how does this factor into a business valuation? Understanding the methodologies involved with the appraisal of your software business can help you make sense of the current market and your place within it.

There are two main approaches to value within the business appraisal world: the income approach and the market approach. Both can be used to value a software company, and a business appraiser will select the best method depending on the reasons for appraisal and the data available for analysis.

For the income approach, an appraiser focuses on the current and future benefits of your business in terms of revenue and expenses. They will utilize this information and discount it in present terms. This is referred to as a discounted cash flow (DCF) of your business.

This approach is appropriate for companies that bring in an unstable amount of earnings from one year to the next, or companies that are not growing at a consistent rate. Since many software companies do not grow at a steady pace, and commonly see material fluctuations for revenue and expenses, an income approach makes sense.

A market approach can also be used for taking the valuation of a company in the software industry. This is more specifically referred to as the multiples of revenues and earnings market approach. In this method, an appraiser looks at the software company's historic financial statements to determine values. The appraiser then compares the software company's values to its peers.

Factors That Affect the Value of a Software Company

Factors that may affect the value of the software company include among others, tangible assets owned, the replacement cost of the software itself, the value of similar businesses (possibly competitors), customer acquisition cost, and measurable advantages to your products

Since there are many factors that affect the value of your software company, you should know what method an appraiser will use, the factors they consider, and how they put this data together to arrive at your company's overall value. Talk with the appraiser during the valuation engagement to better understand what the appraised value really means.

When your business is focused on providing services your customers need, it can be very difficult to determine what your service company is worth. Part of the confusion surrounding this issue is the value of goodwill and reputation in the market place. When a company's strongest asset is the level of professionalism and technical expertise that is provided, the valuation of a company is strongly rooted in the customer experience and satisfaction in a job well done. But how do you place a dollar figure on a reputation? Here's some of what's involved in business valuations for service companies:

What's the Value of Your Service Company?

When a service company is valued, it has a number of differences than other businesses. Instead of manufacturing products, they provide a service, bringing technical excellence where it's needed most. When a company does that well, they begin to build a reputation for good work and demand for their services grows as customers pass on the company's information to other people. Eventually, the company's name becomes synonymous with good service and fair practices. At that time, the business has begun to grow what is known in valuation circles as goodwill.

As an example, let's look at the business Roto Rooter. Even without knowing much about the business' specific strengths and weaknesses, you probably know that Roto Rooter is a plumbing company and that they can take care of a number of different plumbing issues in your home or business. Because that company has grown and spread so strongly, it had grown its reputation and goodwill to the point that the name provides as much confidence in the quality of the work as the individual plumber who is actually performing it. When that name is used, it's expected that a quality service repair will follow.

But how is that turned into a dollar figure when the valuation of a company is being determined? When goodwill is involved, the company becomes more than simply the sum of its parts or the projection of its income. But it's not just the reputation. It also includes the company's reputation, its branding and brand recognition, the managerial expertise in the business, its past innovations, the trade secrets it has developed, its training processes and the clients and suppliers that are loyal to that company and everything it has developed.

To determine the final value of a business, a qualified appraiser must add the value of the company's assets and equity and then determine how much of the business' value exceeds that figure. The amount that is in excess of the asset and equity is typically considered to be the company's goodwill.

Business appraisals of a service company must take into account the reputation and goodwill of the community and its impact on the business' ability to grow. If you're considering changing direction, selling or passing your business to the next generation, do you know what impact that may have on your business' profitability? By working with a certified business valuation specialist, you can ensure that whatever change you're making can be accomplished with minimal turmoil in the community.

If you've been in business for any length of time, there's a good chance that the process of the valuation of a company is something you're at least somewhat familiar with. You also know that business values can change quickly based on market conditions, competitors and industry changes. For this reason, many businesses want the ability to track their company's value over time as conditions change. Though in the past you would have simply get multiple business valuations a particular period of time apart, today's companies often use valuation advisory services to track changes in business value based on changes in the market, the company and similar concerns. Here's some more information on how these services work and how it can help you improve your business' performance.

What are valuation advisory services and how can they help my business?

Valuation advisory services will provide you with a long term look at your business' value and how it shifts and changes in different conditions. In a regular business valuation, you are able to learn the value of your business at that particular time. The business valuation specialist compares your business against other businesses in the industry, as well as other factors that can influence your business' value, then prepares a report using standardized methodologies. That report tells you your business' strengths and weaknesses and where you can make changes to improve your business' value.

But a business can be a very dynamic entity. The market shifts, a major competitor goes out of business, you change the direction of your business - any of these changes can drastically change the value of your business. They can happen at any time and can have a huge impact on your business' bottom line. Even if you've had a business appraisal performed only a few weeks before, the calculated value can rapidly shift into something completely different. How do you keep up with the changes? How can you tell when your business is going in a good direction or when you should shift gears to avoid upcoming problems in the market?

Setting up a valuation advisory service with a well qualified business valuation firm can help give you ongoing insights into shifts in your industry. This allows you to adapt to changes and take advantages of favorable conditions to keep your business ahead of the curve. Do you need to figure out what strategy to take to build your business or weather an industry downturn? Are you considering sorting out an exit strategy and need information on not only what you need to do to improve your sale price but also the best time to sell it? Having the long term information into how your business performs over time can provide you with significant insights that will make it easier to steer your business on a solid course with minimal risks to your investment.

As you can see, when you're considering how business appraisals can quickly change through a variety of conditions, valuation advisory services provide solid long-term benefits to help you grow your business with up to date insights and great opportunities.