Having a company appraisal performed can seem like a simple task, but it's actually much more complex than it first appears. Though you may see the beginning and end result, you're probably not aware of the many tasks that take place in the middle to ensure that you're going to get the most accurate, reliable business appraisal that you can possibly expect. But what exactly takes place behind the scenes and how does it impact the final valuation report that you receive from your appraiser? Here's a quick look at the process from beginning to end to help get you started.

What goes on behind the scenes at business valuation companies?

• Intake: However you get to the particular business appraisal firm that you're now speaking to, it's of vital importance that you're routed to the correct appraisal specialist. You may be asked several questions about your company's business, its size and the reason you're getting the appraisal performed. This all happens to ensure that you're sent to the appraiser with the best experience and track record for your specific needs. A quality business valuation firm will have experience in the trenches, not just determining value by the book.
• Initial Information Gathering: Though you'll have answered some questions, there are probably many more waiting to be asked. Why? The type of appraisal you receive is, in some cases, dictated by law. This is to ensure that in some high-stress situations, everyone is treated fairly. The appraiser will also ask about your competitors, your position in the market as you see it and the overall market conditions to get an idea of how you view these factors that can impact your company's value. A solid look at your finances will probably take place at this time.
• Research: Next, the appraiser goes into independent research mode. They take the time to look at your industry, the market, your company's specific strengths and weaknesses, its reputation in the community and industry, how it fares against competitors in a completely sterile setting and how it's doing in the market as a whole. This may also include a site visit where the appraiser takes a good, solid look around your entire business, finding areas where it's performing well compared to the competition and areas where it may need improvement.
• Report Preparation: The valuation specialist will now take a significant amount of time to calculate the company valuation and prepare a well-researched appraisal report that follows standardized methodologies to develop a final value for your company, This will include a wide range of information to ensure its accuracy. At this time, the appraiser may have another valuation specialist take a look at the report to ensure accuracy and will work with you on any concerns you have about inaccurate values included in the report.

When you have a solid grasp of not only what happens during a business appraisal but also what happens behind the scenes at business valuation companies, you walk away with a much more solid grasp of how those companies work and what to expect from the process. This makes it much easier for you to appreciate the work that goes on to provide you with a solid valuation report on your business and the level of accuracy and integrity that you should come to expect.

When it comes to business valuation, small businesses can sometimes be a special case. Because of how they're operated, marketed and maintained, there are a lot of differences compared to larger companies. But exactly how are they different and what difference does it make when it comes to performing a business valuation? Knowing how to value a small business can help you determine where to focus to improve your company's operations. Here's a quick look into the process and the differences that happen when small businesses are valued.

What's different when you need to know how to value a small business?

Because of the size of a small business, many owners don't see the true potential of their company's value. They often see their business as little more than the value of the collected parts. For a restaurant owner, that may be the value of the equipment and location. But where they often sell themselves short is in terms of community goodwill and overall reputation. Let's look at an example.

Two restaurants both set up shop. One is an average cafe with boring decor, inexpensive prices and standard fare. The other takes the time to develop a western theme, a menu that is unique and friendly staff that help build the overall experience for the customer. Even if they spend about the same amount of money getting set up, the second restaurant will almost always sell for more, because they've developed a following and a reputation for innovation in the market. Their food and the experience is unique, and it's one that brings loyal customers back to the table time and again.

When these restaurants are being valued, the simple cafe may focus on the value of the equipment, while the themed restaurant takes a broader approach to value. The income of each restaurant could be projected into the future to determine the business' overall value, but would probably also reflect a wide difference between the two, probably favoring the themed restaurant which may have a higher level of profitability.

Though some larger companies are based on the public sale of similar businesses, this market-based approach may or may not be appropriate to the small business. Neither restaurant will compete with national chains, but that's not why they've been started. The themed restaurant may be able to be compared to a certain extent to the sale of a single national chain franchise, but will also have differences in terms of separate advertising and marketing demands, differences in fare demanded by the national chain for the sake of uniformity across its menu or operational differences influenced by local suppliers, profitability and similar issues. For these reasons, it's very important to be open to a range of valuation options for a small business.

Small businesses present unique challenges to the business valuation process, partially due to their structure, community goodwill and unique approach to management. If you're considering having a small business valued, you'll want to make sure you work with a certified business appraiser who has experience working with small businesses. That helps ensure they'll know how to value a small business properly. Certification ensures the methodology used in estimating the business' value will stand up to scrutiny in legal, tax agency, financial and insurance circles.

When you're in the process of negotiating a business sale, one tool stands out above all others whether you're the buyer or the seller: the business valuation. But why is it so important to the process and how does it protect both parties as the negotiations go forward? Here's a quick overview of what a business valuation is and what it can bring to the negotiating table.

Why is business valuation vital to negotiating a business sale?

Selling a business can seem like a fairly straightforward process. A buyer and seller connect, agree on a price and transfer ownership, right? However, it's not nearly that simple. How is that price determined? Did the seller simply look at recent sales of similar businesses in the area and use those prices? How do you know whether the asking price is fair or not? Is the buyer or seller being taken advantage of? These questions can plague those who are tied up in business sale negotiations.

Fortunately, there's an easy solution that keeps both sides happy during the negotiation process. A business valuation uses an independent third party who has had training in tested methodologies to calculate the business' overall worth. Because the appraiser is an independent party, they have no interest tied up in inflating or deflating the company's calculated value. This means that the value they calculate is much more likely to be favorably received by both parties in the negotiation process.

The appraiser is also able to use some amount of flexibility in the valuation, depending on the exact circumstances. They can create a valuation report focused on a quick sale, which may not net as much as the seller would like overall, but is often helpful when an estate needs to be settled and the heirs to the estate want a fast resolution to the process. If the seller is willing to wait for the right buyer, a higher value may be calculated to reflect that ideal circumstance.

But what about the buyer? With the independent approach of a certified business valuation specialist, the buyer knows they can have confidence that the calculated value is accurate. Because of the level of research used in the appraisal, the buyer can rest assured that there has been a solid investigation into the company's finances, the condition of the market, the industry's outlook and any special features of that business that can increase or decrease its value. 

For example, when a company has a reputation for innovative product development, the owner may inflate the asking price. But what if the owner's role in innovation is a vital part of that process? The new owner may not find as much value in the company when one of the major innovators is leaving with the sale. A business appraisal looks at these aspects and how the company will change with the sale. They can then take that into account and determine how much of an impact that will have on the overall value.

By getting a business valuation as a part of the process of negotiating a business sale, both sides realize significant benefits in the process. They can walk away from the negotiating table knowing that they've done a good job. The valuation process, when completed by a certified business appraiser, helps ensure that everyone is getting a fair deal. 

When you're looking at a business' overall financial standing, one term that is often tossed around during a business appraisal is valuation multiples. Multiples of what? How is the number calculated? What does it mean to your company's value on the market? Though it can seem like a complex concept, it actually breaks down fairly simply. Here's a quick overview of what valuation multiples are, how they're calculated and how they can impact a company's overall value.

How are valuation multiples calculated and how do they impact your bottom line?

What are they?

Much like multiplication, a valuation multiple represents a specific business value multiplied by a particular figure. That value is typically related to income in the form of discretionary earnings, gross revenue or market conditions. The figure by which it is multiplied is the valuation multiple. Depending on the company involved, this multiple can be anywhere from a small single digit to pushing three digits. 

How are they calculated?

Multiples represent a certain expected amount of income per year. If a company has a multiple of 3x, it means that a buyer is willing to pay the equivalent of three times the expected income to the seller. This means the company's income will pay back the investor over the course of three years, if it continues to perform as expected. A multiple of 5x means the company is valued at five times the projected annual income and that a buyer will see the investment returned over a five year period. However, if a company is actively growing, much higher multiples may be seen.

How do they affect your company's financial situation?

But what impact can these multiples have on your company's financial situation? A startup tech company may only have revenue of $50,000 the first year of operation and $200,000 the second year. If it's purchased at this point, where should the multiple fall? If it's expected to grow to a $20 million annual concern within five years, even paying a 10x multiple on the current $200,000 annual income would only equal a value of $2 million. In this case, a 50x multiple may be considered acceptable.

This not only applies to buying and selling a company, but also to the process of securing financing. Will the tech company, as it stands, be able to reach that level of growth? If it needs additional capital to be able to pull off the expansions that are needed, the company needs to be able to prove to the bank that the company will be able to pay back those funds in good time. An appraisal from a certified valuation specialist uses standardized methodologies to document the company's ability to repay the loan that stand up to strong scrutiny in financial circles, making it easier to secure the financing.

By having a good idea of how valuation multiples are calculated, you're in a better position to improve those numbers and pay or receive a fair price for your company, whether it's for a business loan, a company sale or a business purchase. Knowing where your business stands allows you to improve areas that are weak and push areas that are strong even further to help ensure a successful venture. By working with a certified business appraisal specialist, you're ensuring that the multiples and figures you work from are accurate and represent a solid calculation of your company's overall value.

When you're trying to figure out your company's finances, there are a wide range of formulas and techniques that are available. But which one will work for your company and how will the different options impact your bottom line? One option is looking at earnings before interest, taxes, depreciation and amortization (EBITDA). But exactly what is EBITDA? Here's a look at how this type of value is calculated, what it means to your company and how it can affect your bottom line.

What is EBITDA? How does it impact your company's finances?

So exactly how is EBITDA broken down? Let's take a look:

• Earnings: This refers to net profit, or the amount of money your company is bringing in minus expenses and overhead.
• Before: This one's as simple as it sounds - it's the earnings before everything else is taken away.
• Interest: Interest is typically the figure listed on your company's income statement. It represents the cost of interest on loans and similar financial instruments for that period.
• Taxes: Taxes are also taken from a company's income statement, making it easy to work them into the figure. This refers specifically to income taxes only.
• Depreciation: Depreciation refers to how much value an asset has lost over a particular time period. It may be determined using a depreciation table or schedule, or using an equipment valuation to determine change in value.
• Amortization: Amortization is the expense of a loan, typically in terms of the amount of the loan that has been paid over the year, representing a gain in an asset's value to the company and a lowering of debt.

In general, EBITDA is a great way to determine a company's profitability, but not necessarily its cash flow. This is because it does not actually represent cash earnings, but looks at a wide range of other factors that may come into play with a company's finances. Because it is not a generally accepted accounting principle measure, there is greater leniency with regards to what exactly is included in the statement. It was originally developed to determine a business' ability to service debt. As time rolled on, it became more common when industries had expensive assets that were used for long periods of time. Since that time, it's become a commonplace calculation in virtually every available industry, including the tech industry.

Another report that provides the same basic information is the earnings before income and taxes, or EBIT. The only difference between these two is whether the depreciation and amortization are included in the calculation. When they are excluded from the report, it doesn't mean that they're not being counted, because earnings in this situation refers instead to the company's operating profit.

What is EBITDA? Now that you have a better idea about how this income can be calculated, it's much easier to gain an understanding of how your company operates and its overall financial health. Another aspect of that understanding is the insights you can gain from a business valuation. Business valuations not only provide you with the value of your company, they also deliver information on the market, the industry, your competition and where your company is strong and where it is weak. Why not look at having one performed to see where your company can go from here?

We've all seen examples of it. A business which, though nothing special at first glance, has amazing customer loyalty in the community and a larger market share than makes sense in the area. How exactly does the business gain this type of reputation and loyalty? Even more important, how is that part of the business valued in an appraisal? Goodwill can often have a great deal of benefit and monetary value but is a complex topic. Here's a quick look at how the process works.

How is goodwill calculated in a business valuation?

Unlike your company's material assets, which is considered a tangible asset, goodwill is an intangible asset. It can not be calculated outside of a full business valuation. But exactly how is it calculated? The most basic calculation takes the fair market value of a company's assets and liabilities, and then deducts the amount from the sale price of the business. The remaining amount represents the company's goodwill.

However, it's not as simple as adding up columns in a ledger. How do you calculate fair market value for your company's assets and liabilities? How can you be sure that the figure you have calculated is actually accurate? Will it stand up to strong scrutiny if your business ends up dealing with insurance, legal or financial woes?

But where does goodwill come from and how can you determine whether your company has acquired it? It can come from a wide range of aspects of your company. Are you top in your industry and well known for developing innovative new techniques, products or services? Perhaps your industry is entering a boom and the anticipated future income is increasing its value beyond what it would normally sell for. This is yet another example of goodwill.

What about strong community ties? A company that has spent many years or even decades in the community, building a name and a strong customer following, may have additional value for those reasons. Even better, it's quite often value that a new owner may be able to leverage to their advantage. This is especially true when the previous owner helps pave the way with the community or industry.

Calculating all these potential sources can be difficult, especially if you're considering selling or buying a business. Justifying the amount to be paid for goodwill is equally difficult. What is fair market value for your company's assets? When you have a company that has generated significant goodwill in your industry or region, it can be hard to determine the value of that reputation. Fortunately, you don't have to. A certified business appraiser has the training and experience to create a valuation report that reflects the value of all your company's assets, tangible and intangible.

When a certified business valuation specialist prepares a valuation report, that individual has the knowledge of how to best determine the company's overall value and then calculate the goodwill by separating out the fair market value of the assets and liabilities. But in addition to simple cash value, they will also consider the market conditions, the industry as a whole and any other aspects that may impact the company's value.

Once this process is complete, they'll present the results in a report for your consideration. Once all parties agree that everything has been included in the process, the final value and the value of the goodwill is settled. From that point, it's up to you to decide what to do and with a certified appraiser's report, you'll be able to negotiate from a position of strength.