Business Valuation Blog | Understanding Buying / Selling a Company

We speak with small business owners daily about their interest in obtaining a valuation, usually for a specific and immediate purpose. The reasons typically involve any of the following:

• The owner is going through a divorce
• A partner wants to buy out their shares, or a new investor wants to buy in
• Refinancing or SBA Loan requirements to obtain working capital
• A potential sale or acquisition of a small business
• Estate Settlement/Transfer or Gift Tax
• Setting up a Trust
• Litigation Support
• Internal Business Planning

The last one listed here is the most interesting because it tells me that a business owner is likely thinking proactively to better prepare themselves for future development plans, ideally in the company's longer-term growth planning stage.

Rather than waiting for something to happen that triggers a more urgent need for an updated small business valuation, it might make sense for owners to have professional appraisers conduct annual valuations of their business so that whatever happens down the road, they will be better prepared to face the challenge.

We often witness an owner's hesitation to move forward with an appraisal once we provide a scope of work summary and fee quote. This may be a matter of cost or unwillingness to commit to the work effort involved. Whatever the reason, it's important to think about the decision not only in terms of the immediate need but also with an eye on the additional benefits an appraisal can provide as you continue to be a successful small business owner.

Partnering with a third-party consultant such as a certified appraiser, tax planner or investment advisor, can give you additional perspective from an "outside-in" view that can help you along the way as the company continues to evolve. I think you'll find that the additional time and investment involved with this type of engagement will be minimal in comparison to the overall benefits of fully understanding the worth and potential of your small business.

Let us know if you would like to discuss these topics further by reaching out to us through our website. We would be happy to speak with you personally.

The type of small business you own and its operating history will largely dictate how a certified valuation analyst (CVA) will approach appraising your company. The industry-accepted methodologies considered and ultimately relied upon will play a material role in determining its overall value. Here are a couple of examples:

Scenario 1: If your business has been established for several years in a competitive industry and has shown steady revenues with modest levels of annual growth, then it’s likely the CVA can use both income and market-driven approaches to value. The income approach will consider this consistency and create a discounted cash flow analysis utilizing the Capitalization of Earnings Method. This approach will consider your adjusted net income and create a future income stream which can then be brought back to a current date using an appropriate discount rate.

Under this scenario, the appraiser can also consider and rely upon two types of market approaches, one driven by your company’s annual gross revenues and another by your adjusted net income. By applying multiples to these figures derived from similar market comparable transactions for your industry and business type, the CVA will be able to estimate value.

The result will create three different value perspectives, which can be weighted equally or favor one approach over another depending on the reliability of the variables involved.

Scenario 2: If your business is in its infancy with minimal to no historical financial data behind it, or if it is in a somewhat unique market, then it is likely the CVA will only be able to rely on the income approach to value. In this case, they may look for you to provide a reasonable 5-year forecast which can be factored into the analysis while utilizing whatever financial data is available. Startups looking for new investment for working capital are examples of this as well as companies who operate in niche markets where no comparable data is available.

Scenario 3:  Your business has been in existence for a long time but stagnating over the past few years, possibly as a result of the COVID pandemic, or other market factors, with stabilization and future growth becoming highly unlikely. In this instance, the market approach may be the only option as the income of the business has been inconsistent and unreliable.

In summary, it’s always important to take a proactive approach when obtaining a valuation of your small business. Speak with a certified appraisal professional to learn more about what options will work best for you.

You’re a small business owner who has spent years developing and growing your company from a start-up to a fully established operation. Now that you have reached your initial long-term goal of becoming a successful enterprise, you can start thinking about the next chapters.

Are you content to maintain the current profile of the business and hope for consistent revenue with modest growth over the next 5+ years, or potentially capitalize on your expanded knowledge, market share, and client base to take a bigger leap forward that could possibly put the company in the next tier of small businesses?

To put this in perspective using an arbitrary example, let’s say a small landscaping business just surpassed $1,000,000 in gross revenue with a 20% profit margin after doubling these figures compared with 3 years ago. The business hasn’t needed to take on any additional working capital or expand its employee base over this period to realize this initial level of growth.

The business owner may determine two forward paths over the next 5-year plan that will shape the company's future. The first would be to remain content with the fact that they have reached this initial goal and can look to grow 5%+/- per year based on their existing structure and try to trim expenses and improve profit margins by 10-15%.

This scenario would keep the current employees and clients happy and allow for a steady income stream for the owner who might want to retire or sell the business to its employees or a competitor sometime in the next few years.

The second option would be to take an aggressive growth position now that the company is firmly established with a broader goal of doubling or tripling the size of the company over the next 5 years. What might be a reasonable strategy to accomplish this loftier goal?

The first may be to leverage the existing demand and reputation the company has in the existing market areas while realizing that hiring additional employees would enable them to take on the extra work without overtaxing their current staff. This may lead to significantly increased gross revenue but might reduce profit margins given the expanded overhead.

Another strategy might be to research your competition in nearby market locations and attempt to acquire one of these businesses and expand the company’s territory. This effort would require a lot of due diligence to target the right business and might require a working capital loan to purchase the company. The short-term effects may result in lower margins and a greater risk associated with the transaction, however, the potential of creating a more diversified business with immediately impactful growth results will go a long way to increasing the value of the company.

Either path you decide to go down will be an exciting one.

One of the most exciting and daunting experiences for a business owner is when the time comes to sell the business. After years of hard work, development, and growth, the day eventually arrives when you believe the best option is to cash out and move on to the next chapter of your life.

One of the most essential steps in the selling process is to obtain an independent valuation of your company so you can understand the fair market value of the business as a whole, as well as the underlying tangible assets and goodwill. The appraiser you choose to work with should be certified through the NACVA, ASA, or some other nationally recognized association. Make sure you discuss their credentials before moving forward.

If you own a lot of equipment and real estate as part of your asset base, you should first engage with accredited appraisers who specialize in those areas before completing the full company valuation. Once that’s complete, the business appraiser will include those value estimates as part of their review, along with the rest of their analysis.

Take time to go through your financial documents with the appraiser so they understand the adjustments that should be made to non-recurring and discretionary expenses so you can present the optimal profitability of the company. Two of the key variables in the analysis will be your gross revenue and adjusted net income (EBITDA), along with the potential for future growth, which can be determined based on a reasonable forecast of future revenue over the next 3-5 years.

Since you are selling the business, as an owner, you are expected to settle the liquid assets and liabilities reported on your balance sheet, specifically the cash, short-term receivables, and any outstanding debt. Hopefully, the net outcome for these is positive, so in addition to the value of the business, you can walk away with additional cash to supplement the overall sale price.

The buyer understands that when they purchase the company, they will need to develop their own sources of cash flow, whether that be personal capital, taking out new loans, or developing equity from investors.

Selling your business will likely take a lot of patience and communication to provide all the necessary support documentation to potential buyers, and you may want to engage with a business broker familiar with your industry and markets, who can assist with the overall process. In the end, make sure you are comfortable with all the terms of the deal, and carefully read through the documentation involved. Consider hiring a business attorney to make sure you have all your bases covered and when it is all over, take a deep breath and enjoy what comes next.

For new business owners, it can take years to finally reach a point where a certain level of success is reached, and all the hard work and long hours finally pay off. Success is measured in different ways and can be fleeting or inconsistent. There are many reasons why success is eventually achieved, the most obvious being dedication, relationship building, and developing a competitive edge that sets your company apart from the rest.

In today’s business climate, there are both new and old concepts to consider when developing a longer-term game plan. The key to longevity is understanding and taking advantage of these areas and building a business model that creates optimal efficiency and effectiveness year after year.

Here are a few to think about:

Website Development and Search Engine Optimization (SEO)

Small businesses no longer need to rely heavily on word of mouth and referrals to grow their business and attract leads. In today’s climate, there are a lot of potential customers who will simply search the web when they need products or services. Even local businesses that have a small regional customer base will benefit from having a great website and SEO model that drives their company toward the top of “Google” searches. It’s the simplest and fastest way for customers to find what they’re looking for so take advantage of it. Consider upgrading your website and its searchability to increase your volume of leads.

Key Employee Retention

You can give yourself as much credit as you deserve in succeeding with your small business, just don’t forget the others who have helped get you there. When you are fortunate enough to have key employees who work as hard as you do and fit into the model that you are building, don’t let them go. Great workers don’t grow on trees and can be just as critical to the company’s growth as you are. Do what it takes to retain them and acknowledge their importance to the business.

Maximize Your Cash Flow

If COVID taught us anything, it’s developing a business that can sustain itself when revenues are down over a steady period. While that experience might be an anomaly, you should consider structuring the financial side of your business so it can remain healthy during slower revenue periods without constraints on making payroll and fixed expenses. Think about stashing some funds away, restructuring your debt, or leveraging some equity you might have in real estate or equipment. Don’t overinvest in long-term projects that might have additional risks associated with them. In other words, manage your money for the long term and you will have a greater chance at continuing success.

Being a small business owner is both exciting and stressful and has significant benefits and responsibilities beyond a typical employment position. Taking on all of the ownership responsibilities yourself or considering a partnership is a critical decision you may need to make at the beginning of the venture and afterward, once the company has been operating for a number of years.

Circumstances may decide this for you, or you may have more control over the process. Either way, here are a few things to consider when thinking about what is best for you.

Can You Manage Everything on Your Own?

This is probably the first thought that goes through your mind when starting a new business or potentially buying out existing partners. Do you have the experience, drive, and time to accomplish the day-to-day operations involved with 100% ownership? The answer will rely in part on the structure of the operation and how much you can delegate to employees, as well as your general desire to answer to no one but yourself.

Do You Have the Capital to Invest and Maintain Adequate Cash Flow by Yourself?

This is especially critical in the early stages of operation when you are trying to establish the business and before you have developed the levels of revenue to sustain and grow. Most business owners should expect a drain on their personal funds during this period unless they bring in working partners or silent investors to alleviate the burden.

Are You Having Trouble with Certain Partners?

This issue might be the most challenging one you face as a business owner during all phases of development and growth in the company. Bringing in the right partners and investors who match your goals, complement your skill set, and seamlessly get along with you both personally and professionally might seem like an impossible task. Developing and maintaining a high level of trust and compatibility with other people in business and life is something we all strive for but is rare to find over the long haul.

If you do, work hard to hold onto those relationships and continue to be successful. If philosophies change and you find yourself constantly butting heads with existing partners, you may have to decide if a change makes sense for the better of the business and yourself. Being your own boss is generally thought of as a great situation, especially later in your career, when you have all the tools to be successful. Many small business owners have found the right formula to work well with their partners and share the burdens and successes of ownership.

With 2024 in mind, many of us vow to change a habit or two and get a fresh start on improving our way of life with the proverbial New Year's Resolution. This change in mindset can often be fleeting when the thought process does not materialize into instant benefits after minimal dedicated work effort. The brain can quickly adjust back to telling you that everything is fine, and you feel pretty good about yourself.

The same can be said for your business where it is much simpler to continue with the old way of doing things, especially when the year-to-year results are solid, and you and your staff seem content with current operations. There might not be any reason to overhaul your business model, however, you can always be more proactive in looking ahead and tweaking a couple of things based on recent experiences and increased knowledge.

One of these adjustments should involve not waiting for a reason to take a concrete look at your company and establish a baseline value, so you can better measure the real worth of all the effort you’ve put behind it over these past years and create a tool that can monitor progress in the future. Obtaining an independent, professional appraisal of your business is always a good idea, regardless of what might otherwise force the need to complete one as part of a pending transaction.

Most business owners wait until they absolutely need to have a valuation done, in complement to such things as bringing in or buying out a partner, a personal divorce, or refinancing debt to obtain working capital. As a result, there is a sudden rush to get it completed, and the added pressure of working through the process can further stress an already time-consuming and tedious situation.

If you have already recently completed a valuation, while using an experienced, accredited appraiser, it is simply a matter of sharing this report with the appropriate parties and immediately checking the box for this requirement. Advising your valuation expert that the purpose is for “internal business planning” will allow you to utilize the report for most of these future developments. Getting into the habit of updating the business valuation annually will make it more certain that the results are current and will be sufficient for any third party to review and consider as part of the larger transaction.

Being proactive is generally considered a benefit in your day-to-day life. Having a similar game plan when it comes to your business is just as important, if not more critical when it comes to continued success.

When you decide your company needs to be valued for whatever reason, whether you are seeking additional working capital, taking on new investors, buying out a partner, retiring, or in the middle of a personal or professional dispute, you want the end result to be supportable and reasonable.

It’s important to keep in mind that the appraiser you select knows little to nothing about your business until you begin to communicate and share information. The first half of the process will be a fact-finding mission, with the goal of providing sufficient financial data and other key information to the appraiser, while they suggest to you the best approaches and methodologies to take.

This level of communication and data flow will also present the valuation professional with a better understanding of the larger picture, whether that involves a critical transaction you are trying to close, the settlement of a divorce or partial buyout, or providing you with a value that can be presented to potential purchasers in the open marketplace.

A third-party valuation is independent and unbiased; however, this is the chance to present your individual perspective as a business owner so the appraiser understands what you’re trying to accomplish, and certain variables that only you may be aware of that could influence the outcome. Trust that the professional working with you will understand how best to consider all the potential adjustments and make reasonable decisions in the overall scheme of their analysis.

As a result of these meaningful communications, the second part of the valuation, which involves the appraiser’s review, research, analysis, and report writing, will result in a thoroughly examined and reliable outcome. It likely will also end up being more in line with your expectations. No business owner wants to go through the effort of working with external consultants and service providers only to end up with surprising, undesirable results.

Many business owners might believe the value of their company is more than what the market might dictate; that’s just human nature. However, the more the appraiser understands your experience and specific history working every day as the head of the company, the more likely the final value opinion will be in line with your expectations.

Before you commit to a specific appraisal professional, spend time discussing these kinds of topics so you feel comfortable that you will be working with a well-balanced firm that understands the important factors that go into a business valuation.

When it is time to close a business and there are no realistic sale options, there are several steps needed to officially dissolve the company, so no loose ends come back to affect you in the future. One of those requirements is filing forms with the IRS and/or your state for final tax settlement purposes. Depending on the structure of your prior operation, you may need to obtain an independent business appraisal as part of this process.

Here are a couple of things to consider when a final valuation comes into play.

Transfer or Sale of Assets

If your business owns a lot of equipment or vehicles, you will look to estimate a final value if you plan to sell them or transfer the property to another entity, such as a new company, or to yourself. This will show a clean break between when the old business was responsible for the assessment and when the new owner took over responsibility for them.

A machinery & equipment appraiser can complete this report as part of the overall business valuation.

If you own intangible assets such as patents, trademarks, domain names, customer lists, or transferable software, the value of these would be estimated by the business appraiser as part of any remaining goodwill of the company.

Valuation Methodology

The focus of the business closure appraisal will likely be solely on the remaining tangible and intangible assets; however, if there are any remaining accounts receivables, payables, long-term debt, or revenue streams not yet fulfilled, these will need to be considered as well.

The asset approach will probably still be the driving methodology utilized by the appraiser while adjustments are made to take these other factors into account.

In an ideal scenario, when it is time to move on from a business, you will be able to find a buyer that allows you to maximize the company's remaining value. If shuttering the operation is your only option, there will likely be additional housekeeping tasks to take care of before you segue to the next chapter of your career.

To learn more about these requirements, consult your accountant and an independent valuation expert who can provide further insight.

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.