Business Valuation Blog | Understanding Buying / Selling a Company

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.