Business Valuation Blog | Understanding Buying / Selling a Company

Small Business Owners: Don’t Prioritize Price Over Quality!

Posted by Business Valuation Specialists LLC on Jan 29, 2024 7:30:00 AM


Business Appraisal Quality vs Price AppraisersBusiness 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.

Tags: Business Valuation, business appraisers, quality

Valuations for Divorce Purposes-Avoid Getting in the Middle

Posted by Business Valuation Specialists LLC on Dec 18, 2023 7:30:00 AM

Divorce case Business Valuation Appraiser

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.

Tags: Business Valuation, Business Appraiser, divorce

Business Valuation When Settling an Estate

Posted by Business Valuation Specialists LLC on Nov 6, 2023 7:30:00 AM

Estate Settlement for Small Business Valuation work with Appraiser

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.

Tags: Business Valuation, small business valuation, appraiser, Estate Settlement

Does Market Value Equal Your Ultimate Sale Price?

Posted by Business Valuation Specialists LLC on Oct 23, 2023 7:30:00 AM

Market Value v Sale Price in Business Valuation

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.

Tags: Business Valuation, market value, sale price

A Multitude of Reasons to Obtain an Updated Business Appraisal

Posted by Business Valuation Specialists LLC on Jul 17, 2023 7:30:00 AM

Reasons for Business Appraisals

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.

Tags: Business Valuation, Business Appraiser, reasons for business valuations

Valuing Small Business Start-Ups

Posted by Business Valuation Specialists LLC on Jun 19, 2023 7:30:00 AM

Appraisers Business Valuation Start-Up Company

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.

Tags: Business Valuation, business appraisers, startup company

Valuing Affiliated or Subsidiary Companies

Posted by Business Valuation Specialists LLC on May 22, 2023 7:30:00 AM

Accounting Records LLC Subsidiary Divisions Business Appraisals

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.

Tags: Business Valuation, accounting, subsidiary, divisions

Work Closely with Your Business Appraiser to Get Optimal Results

Posted by Business Valuation Specialists LLC on May 8, 2023 7:30:00 AM

Business Appraisals Small Business Owners

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.

Tags: Business Valuation, Business Appraiser, business owners, small business

Independent Business Valuation for Divorce Purposes

Posted by Business Valuation Specialists LLC on Mar 13, 2023 7:30:00 AM

Business Valuation Appraisals Appraisals Divorce

Most everyone is familiar with the commonly cited statistic that 50% of all marriages end in divorce. Unfortunately, this estimate is essentially factual, with around 40% of first marriages and 60-70% of second and third marriages making up that average figure. Experts will also tell you that the last three years of hardships (we all know which ones I am referring to) have driven these numbers up further and will continue to rise in 2023.

If one or both of the partners in a divorce owns all or part of a business, the value of the enterprise and its underlying assets will likely become subject to the overall divorce settlement. A dispute as to the assessment of the fair market value of the business is commonly a factor in many divorce cases. The best way to resolve any dispute, ideally in an amicable fashion, is to engage with a certified business appraiser, who can provide an independent value based on reviewing the company history, analyzing financial data, researching the market, and understanding the assets associated with the operation.

Divorce attorneys will often be the representatives who suggest this approach during the proceedings and will work directly with the appraiser to facilitate the collection of data from either or both parties involved. This process can get bogged down for any number of reasons, and the judge or arbitration representatives involved should look to expedite the process with the legal means available to compel the availability of the information needed for the appraiser to complete the appraisal.

Without cooperation on both sides to work through the valuation issues together, the roadblocks to settling these cases can pile up, andthe divorce terms may ultimately be decided by the courts, who have no personal stake in the business or the overall case. The courts will look to rely on any experts involved in assessing value and if both parties engage separate appraisers, it could lead to deposition or trial testimony to ultimately determine value.

It's logical to assume it would be ideal for both parties if these decisions were made amicably and mutually however, the reality is that many divorce settlements become very difficult to settle due to significant differences of opinion, making the ability to work through the process unattainable without the assistance of independent third parties. When it comes to maximizing your chances of arriving at a fair settlement of business value involved in a divorce, seek out an unbiased experienced appraiser to work through the issues with you.

Tags: Business Valuation, divorce, business appraisers

Business Owners and Appraisers Working Through Partner Buyouts

Posted by Business Valuation Specialists LLC on Feb 27, 2023 7:30:00 AM

Business Valuation Appraisals Partnerships Buyout

As a majority owner or equal partner in your business, there may come a time when you need to settle a buyout request from another partner or investor who is opting out of their ownership interest. When this occurs, there are a few things to focus on that will impact the agreement and it is common to look for guidance and assistance, including the engagement of a certified valuation professional.

Does your company have an internally developed buy-in/buyout or another type of operating agreement that lays the groundwork for assessing value when these situations occur? Proactively handling these eventualities is never a bad idea and is quite common for rapidly growing businesses that are frequently looking for new investors to manage capital funding requirements and add value.

Is the partner or minority shareholder a key contributor to annual revenue? If so, is there a non-compete agreement in place to buffer the effects of this departure in the short term? If not, should the company be valued with the anticipated losses in sales or is there a mutually agreeable arrangement to replace the partner and offset this reduction?

If the investor is buying out of a minority interest, should discounts be applied to reflect the value of his or her shares in relation to majority ownership? This topic is commonly debated in valuation assignments where the shareholder may not have the same level of control as a larger investor, or it would be more difficult to attract a replacement given the lesser interest.

Given these variables may create a divide between the parties on the ultimate price to be paid with partner buyouts, a dispute may ensue which may drag out the process and even lead to litigation between the parties. Engaging with a certified professional business appraiser will provide an independent, unbiased assessment of value which will hopefully facilitate a fair settlement.

In any case, when a minority owner or partner opts to buy out, it may warrant the need to formally update the value of the business and associated shares so you and any remaining investors can better understand the overall current status of the company. The benefits of having an independent appraisal of your business and the underlying assets can go well beyond these immediate concerns such as assisting with future growth plans and reviewing your tax and accounting requirements.

Tags: Business Valuation, partnership, buyout, Business Sale or Purchase Appraisal