Business Valuation Blog | Understanding Buying / Selling a Company

If business appraisers had crystal balls, it is highly likely their opinions of value would match the actual price determination in a negotiated transaction or settlement. In this fantasy world, the advice and estimates that valuation professionals provide their clients would almost always occur exactly in accordance with their conclusions. In reality, the variables that can potentially impact the results of any final transaction, from a personal or business perspective, are many, and the best outcome the deal participants can hope for is that the independent opinion will be relied upon by both sides and positively impact the situation.

Appraisers are asked to estimate value based on a specific set of circumstances and assumptions, which will then dictate a number of variables to consider and rely on that are pertinent to the overall assets under consideration. The result is a well-thought-out estimate of value, based on the market and industry information they research, along with an analysis of the internal data they are provided with.

From an owner, investor, or seller’s perspective, the value conclusions can be reasonably relied upon; however, they are not a guarantee of any specific outcome. An appraisal is, therefore, not absolute; however, it should be used as a basis for negotiations between concerned parties, whatever their interests.

In an open market, many variables come into play when buying or selling any asset. The final sale price should be within a reasonable range of the appraised values; however, unforeseen factors that an appraiser cannot foresee may influence the transaction and be inconsistent with the prior assumptions.

Appraisals can also serve as a guideline to facilitate the settlement of disputes when there is no agreed-upon or pre-negotiated value for scenarios such as a divorce or a partner buyout. Differences of opinion are commonplace when it comes to valuing assets, whether that be with machinery & equipment, personal property, real estate, goodwill, or the overall worth of a business. Experienced appraisers who are accredited in their specific field can greatly assist in facilitating a successful outcome where these differing opinions exist.

The primary reason for hiring third-party appraisers is to remove emotion and bias from the equation when involved in a purchase, sale, buyout, or dispute. As long as the valuation professional is educated and experienced, these opinions will be well researched and supportable, enabling the parties and decision-makers involved to have an impartial perspective to assist in finalizing the terms of the transaction.

As the saying goes, nothing in life is certain except death and taxes; however, having reliable, dependable opinions can go a long way toward achieving a favorable outcome.

As valuation professionals, you probably get asked about your expertise in certain industries when bidding on new appraisal projects. This is a reasonable question to receive from potential clients looking to engage with the most qualified candidates, however, your response should be both an honest and thoughtful one, focusing on the realities of industry experience.

The vast majority of certified and accredited appraisers, whether they specialize in business valuation, machinery & equipment, personal property, real estate, or any other discipline, cannot afford to limit their experience to a few specific industries, as this would severely reduce the number of opportunities for work and future growth of the business.

The fact is that companies who focus solely on valuation work and have the necessary credentials and experience as appraisers can effectively value properties across any and all existing industries and market segments. This is primarily because the continuing education and experience derived from working as a valuation professional is focused on implementing consistent and effective approaches and methodologies for appraising any company or asset, regardless of the industry. In addition, the appraiser will always rely, in part, on the specific market segment data and sources developed during the valuation process. Understanding how to research, review and analyze the market and industry data, while independently concluding on a reasonable value, is what separates the experienced appraiser from the rest of the pack.

There is a distinct difference between experience and expertise. As an appraiser, you may have years of experience valuing businesses within dozens of distinct industries, which is useful when potentially working in those same markets in the future, however, your expertise is in valuation and doesn’t need to be industry focused.

There are specific industry consultants who exist to assist their clients in any number of business decisions that can affect a company’s future success. For example, an oil and gas consultant might help their client enter a new energy market segment by developing a business plan that involves various marketing and investment strategies. That is generally where industry expertise comes into play. They may understand the concept of valuation and have certain opinions, however, they lack the training, experience, and expertise to effectively appraise that business.

In summary, it is important to advise your clients of these distinctions and the fact that your expertise is in valuation and not limited to any particular industry. An effective response can help explain that you will consider their specific market and industry as part of the overall appraisal while applying accepted, time-tested methodologies resulting in an independent, supportable conclusion of value.

As a business valuation professional, oftentimes your work effort goes beyond the preparation of an appraisal report. Business owners may engage with a more comprehensive advisory team to accomplish their goals, including tax, accounting, and legal representatives. With the potential threat of audits and legal disputes involved with certain ongoing project requirements, this team of experts may all have a role in the successful outcome for your client.

As the valuation professional, ensure that you include a clear delineation of the scope of work and fees associated with preparing and delivering the appraisal report and any follow-up consulting work which may arise as the transactions or cases develop. One option to accomplish this is to have a fixed cost for your initial report and hourly rates specified for any work pertaining to the continuing efforts related to the larger advisory team.

If you know the valuation work will be included as part of an ongoing or potential audit, or if litigation consulting and testimony may be involved, discuss these issues with the client and other members of the advisory team, so you can gauge the depth of additional time involved and look to better plan the future scope of work.

Ensure you document all your discussions, both by phone and email, while tracking your time on a weekly or monthly basis so you can support the additional costs involved with the prolongation of the appraisal engagement.

Look to these kinds of projects as an excellent tool to gain additional experience while working within a team environment where a common goal is to bring value added to your client’s transaction or legal case. Better understand the larger perspective of the matter so you can best prepare and potentially bring thoughtful suggestions to the table which relate to your role in the scope of work effort.

The most successful service providers understand how to look outside of their day-to-day analysis and report responsibilities and develop expanded opportunities in a business consulting and support environment. In a professional world where disputes are common and must eventually be ironed out, you can leverage your expertise to involve yourself in these cases and become a more diversified appraisal firm.

With all the craziness that 2020 has brought along with it, from COVID-19 to civil unrest, to wildfires and storms causing broad power outages, one way of counteracting the uncertainty of your company’s future is to have an updated business valuation completed which not only focuses on historic performance but projected outcomes as well.

Working with you and your company’s key personnel, the certified appraisers at Business Valuation Specialists will walk you through the process and provide insight as to the key information needed to analyze the value of your company with past, present and future scenarios considered.

You may want to consider selling in the current market, capitalize on buying a business which needs further examination, or reaching out to new investors and financial institutions who can provide the necessary capital to get you through these tumultuous times. Regardless of the reasons why, it is always a smart decision to obtain an independent valuation which will hold up to the scrutiny of the parties involved in the transaction.

The experienced, certified appraisers at Business Valuation Specialists are ready to discuss the next steps with you. We look forward to the opportunity to work with your business as you continue to wade through these difficult times.

Whether your company is expanding or going through a downturn, being purchased or sold, audited or invested in, refinanced or liquidated, it is important to understand the real market value of your business for you, your partners, employees and key third parties involved with your operation.

Obtaining a business valuation from a qualified appraisal firm such as Business Valuation Specialists can provide you with firsthand knowledge of the value of your company and what to expect should you wish to buy, sell, refinance or bring in new investors. A formal appraisal analysis and report can assist you in any number of ways as you move through the next phases of your company’s development and can be shared with third parties who may be assisting you with these project plans.

We will work closely with you to determine the critical information needed to complete the valuation analysis and answer any questions you may regarding the process. The experienced, certified appraisers at Business Valuation Specialists are ready to discuss the next steps with you. We look forward to the opportunity to work with you and your business as a key component to your ongoing business projects.