Business Valuation Blog | Understanding Buying / Selling a Company

Bitcoin mining businesses have gained popularity due to the rise of cryptocurrencies and, therefore, operate in a volatile, tech-driven environment, which will create unique challenges for a certified appraisal professional.

The value of a mining operation largely depends on its hardware equipment. High-performance ASIC miners are critical for efficiency and profitability. The quality, age, and capacity of these assets are important to understand. More modern, energy-efficient machines will add value, while outdated equipment may be a liability. The infrastructure, such as cooling systems and power management, also play a crucial role. As a result, a separate tangible asset appraisal should be conducted along with the overall business valuation.

Electricity is the largest operational expense for Bitcoin miners. An appraiser should determine the business's access to low-cost energy sources. Mining operations located in regions with abundant renewable energy or subsidized electricity tend to have a competitive edge. Additionally, energy efficiency metrics, such as power usage effectiveness (PUE), indicate how well the business is optimized.

The value of a mining business is also heavily tied to Bitcoin's price. Higher prices typically lead to increased profitability, while market downturns can significantly impact revenue. Consider the business's ability to withstand price fluctuations, including cash reserves and hedging strategies.

A miner's hash rate—the computational power it contributes to the network—is a key metric. Compare this with the overall Bitcoin network hash rate to assess competitiveness. If the network's difficulty increases, smaller or less efficient miners may struggle to remain profitable.

Review historical and projected financial statements. Key metrics include:

• Mining rewards: Bitcoin earned per block mined, including transaction fees.
• Operating costs: Energy, maintenance, and labor expenses.
• Breakeven price: The Bitcoin price required for profitability.

Other factors, such as the regulatory environment and the company's future expansion potential, will also play a part in estimating value. The ability to upgrade mining capacity and technology is critical to long-term growth.

In summary, valuing a Bitcoin mining business requires a mix of traditional financial analysis and industry-specific knowledge. By considering factors like equipment quality, energy efficiency, and market conditions, you can gain a clearer picture of the business's worth. However, remember that cryptocurrency mining is inherently risky, so any valuation should factor in the industry's volatility and potential regulatory challenges.

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.

Business owners are constantly having to review their annual expense budgets for both fixed overhead and variable costs that arise from new projects and demands that come up in any given year. It is common for decisions to be made based largely on who can deliver the lowest price, especially in a competitive market where the product or service needed can come from a multitude of vendors.

This strategy might save you money in the short term however, there is oftentimes a loss in quality that comes with working with the cheapest option that can come back and haunt you later on. Quality can be measured in more ways than one, and it’s a good idea to think about what’s most important when it comes to working with your providers before deciding on who to engage with.

Here are some areas where quality can justify paying a higher price:

Customer Service from Start to Finish

Who is communicating with you most effectively and consistently when you are inquiring about purchasing the product or service? Are they making you feel like their most important client from day one, even before you commit to working with them? Do they follow through with that same level of communication and delivery after you’ve contracted with them? If the cheaper price leads to poor customer service and late deliveries, then take your business elsewhere.

Reliability of the Product or Service

Are you ultimately receiving the best, most dependable product that you expected and required to satisfy your business’s transactional needs? What are the costs to your business if you receive an inferior service? Do you potentially suffer a hit to your own company’s reputation or end up on the losing end of a business dispute due to poor quality?

Your Own Time and Effort Costs Money

Will working with the cheaper vendor be more time-consuming for you or your employees? Does the more expensive provider have greater experience and display a more professional, take-charge persona that will save you time and effort, which translates into cost efficiency for your business? This type of savings can be significant in comparison to the money you saved by purchasing the lower-priced product.

In summary, consider the benefits that will likely go along with choosing quality over cost, especially if you find the cheaper alternatives are not all they’re cracked up to be.

As certified, professional business appraisers, we engage with quite a few clients and their attorneys who are going through a marriage dissolution/divorce and need to value a business owned by one or by both parties involved. The workflow process should not be much unlike any other type of valuation; however, the potential “drama” that often occurs during divorce proceedings can sometimes bleed into the ongoing communication.

If this happens, it is important to take a step back and reaffirm how the appraisal agreement is structured, and who your client is. As a rule of thumb, never allow yourself to be dragged into any disputes between the two parties that play out during your involvement with the case. Remember that you have been hired to act as an independent service provider who is there to facilitate part of the divorce settlement by providing an unbiased opinion. You have no personal or professional investment beyond this scope of work.

If your client is one of the ex-spouses and/or their attorney, all communications should be with these parties only. If representatives from the other side contact you looking for information, you should advise them that all comments or inquiries be made to your client directly, and kindly request they not to contact you further. Immediately notify your client of the situation and ask them to intervene and gain control over it.

Even if your client does not own the business, they are the ones who will need to obtain the necessary documentation required to complete the appraisal from the party that does. Even in rare cases where the divorce is amicable and both sides cooperate fully, you should ensure all communication and data come from your client only.

Another scenario would be a co-client agreement, where you now have to deal with both sides agreeing to the valuation, signing, and paying their share of the fee. This may be a court-mandated arrangement, and working through this process will likely be even more delicate. You will have to carefully manage communications with both parties and possibly their attornies without getting caught up in the residual emotions and disagreements.

You may want to avoid these types of engagements altogether given the amount of management they will likely require; however, if you do find yourself in this scenario, consider organizing a joint call or email with clear instructions on how you plan to handle the process flow. There is added responsibility on your part, and you will need to develop a streamlined way of getting the requisite information to complete the appraisal.

Either way, working through a business appraisal for divorce purposes will always have the potential of being a uniquely challenging project.

When there’s a need to settle someone’s estate, there are a lot of things to consider, and given the emotional component of this difficult and hectic time, it can become overwhelming. If the individual wholly owned or was a partner in a business, you will need to consider placing a value on these estate assets, to properly and fairly include them in the settlement. It’s important to work with an experienced independent appraiser who understands the best methodologies to consider and has no “skin in the game” that might create a biased opinion.

When reviewing the ongoing businesses under the estate, it is also a good idea to look ahead at how you believe the future of the company may be affected by the prior owner or partner no longer being involved. Is there an opportunity to sell the company before the effects of their absence take effect? Are there factors to consider in taking the company forward under new direction or management?

While you’re taking care of the short-term demands involved in settling the estate, discuss these more proactive topics with an appraisal professional who can provide options where the valuation might consider these additional perspectives. It’s often feasible for an appraisal consultant to assist not only with valuing the business as of the effective date under the estate settlement but also look ahead at a more current date for the purposes of a future sale or change in the structure of the company.

Before you decide which consultants to engage with during this trying time, inquire as to their ability to work with you on multiple fronts so you can accomplish more than the immediate objective and determine if they can assist with all or most of the concerns you may be thinking about today.

It’s difficult enough to handle all the tasks involved with settling an estate, especially if the individual owns a large number of assets. The more support you have to accomplish all these, the better your ability to manage everything in a timely and effective fashion.

If you are in the middle of an estate settlement, consider reaching out to professional consultants such as certified and accredited appraisers, who will be there the moment you need the assistance.

In a perfect world, the advice and opinions that professionals provide you and your business regarding expected events would always occur exactly how they thought they would. In reality, the number of variables that can potentially impact the results of any transaction, from a personal or business perspective, are many, and the best anyone can do is reasonably understand them and estimate how they will impact the situation.

In the valuation world, appraisers are asked to opine on value based on the variables pertinent to the overall transaction in consideration. The end result is a well-thought-out estimate of value considering the market information they research and the internal data they are provided with to analyze.

From an owner, investor, or seller’s perspective, the conclusions can be reasonably relied upon; however, they are not guaranteed. An appraisal should not be considered absolute but can be used as a basis for negotiations between concerned parties, whatever their interests.

From a purchase or sale perspective, in an open market, there are many variables at play when trying to trade these assets. The final sale price should be within a reasonable range of where the appraised values were estimated. There may, however, be unforeseen factors that influence the transaction that an appraiser cannot foresee occurring, and that are inconsistent with the assumptions made.

Appraisals can also be used as guidelines in settling disputes when there is no agreed-upon or negotiated value associated with situations like a divorce or partner buyout. Differences of opinion are commonplace when it comes to valuing assets, whether that be with machinery & equipment, personal property, real estate, intangible goodwill, or the overall worth of a small business. Experienced appraisers who are accredited or certified in their specific field can greatly assist in facilitating a successful outcome where these differing opinions exist.

One of the primary reasons for hiring appraisers is to create an independent unbiased opinion that is well-researched so the parties directly involved and those ultimately making decisions in the matter can have an impartial perspective to assist in rendering their own decisions.

Like most things in life, nothing is guaranteed; however, having reliable and supportable opinions can go a long way to realizing a favorable outcome.

Determining if you need to engage with an independent professional business appraiser will commonly arise when you are looking to purchase or sell a business. However, the fact is there are several other reasons an objective third-party appraisal is a great idea, and quite possibly a requirement to move forward with a transaction or to aid in a situation where a dispute may arise. Here are some examples:

Investor Buy-In or Buy-Out: You will look to have a fair assessment of company value determined to avoid a dispute and support a smooth transition.

Bank (Re)Financing: Virtually every bank or related lending institution will require an appraisal for loan purposes.

Litigation Support: Any legal disputes that bring your business into account will need an independent appraisal to facilitate a settlement or add support in a trial or arbitration.

Accounting and Tax Purposes: There are any number of reasons you will need appraisal work to aid in the review and approval of accounting and tax procedures.

Estate Settlement: When a family member passes and they own a business, a valuation will be an important component to transferring the property.

Development of a Family Trust and Legacy Transfer: When the next generation is ready to step in and take over the family business, an appraisal will be critical to the process.

Donation and Gift Tax: Some business owners may decide to donate their business or extend financial gifts through it. The IRS will require an independent valuation in support of the donated amount for tax deduction purposes.

Internal Business Planning: Looking ahead with long-term company goals from a growth and resource perspective will be much more effective with an appraisal assessment in support of project planning.

Divorce: If changes to your personal life include a divorce, your business, and personal property may become subject to the settlement.

If you find yourself involved with any of these situations, consider engaging with an independent, certified business appraiser to assist in facilitating the process.

We receive several valuation inquiries every year from companies still in their infancy stages that are looking to attract new investment through private equity or by bringing in additional partners with the right talent to help them achieve their goals. These “start-ups” are often thought to come from the various technology markets, however, anytime an entrepreneur begins the process of developing a business from scratch, regardless of the industry, they are considered a start-up.

With a start-up from a valuation perspective, you will not be able to rely on historic financial performance and the current balance sheet will likely be very limited. There will potentially be some comparable established companies publicly available to research, however, these may not be similar enough to rely upon given the specific business plan the new company is developing.

Most likely, your potential client is looking for the appraiser to rely on a future growth strategy, typically a five-year plan, as the basis for the appraisal, given this data will create a more favorable value conclusion. If you plan to value a start-up company, here are a couple of additional thoughts to consider:

• Ask your client to provide a business plan including forecasted income statements and balance sheets. It is important to advise them that the data needs to be reasonable and supportable, based on as much background and research they have performed and which they can provide details for. If the forecasts look overly aggressive, they will need to come up with as much support as possible to justify their growth plans.
• Advise your client that as a professional appraiser, you do not have forensic accounting capabilities or business planning experience, and therefore, will be relying on the data provided by them to be accurate within reason. The appraiser cannot actively participate in the development and verification of the forecasted data.
• Ensure that your appraisal report includes sufficient narrative summary discussions on the scope of work, advising readers that your value conclusions are based in large part, or even solely, on this future business plan. Add that should the plan not come to fruition, or be considerably different than the forecasted estimates, the value of the business will be materially altered.

If you, as a certified valuation professional, are not comfortable with the information provided by the client and believe it to be unrealistic based on your experience with similar situations, you should discuss this with them and ask that they adjust the data. If you can’t agree on a game plan, you can potentially opt out of the work if that is a contractual option. Valuing start-ups is a challenging endeavor therefore, ensure you have these issues covered before taking on the appraisal assignment.

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.