Business Valuation Blog | Understanding Buying / Selling a Company

Appraising Closed Companies for Tax Discharge and Dissolution

Posted by Business Valuation Specialists LLC on Apr 11, 2022 7:00:00 AM

Business Valuation Appraisal Business Closure IRS Discharge and Dissolution

In the aftermath of the pandemic and in consideration of continuing economic hardships for many businesses in highly affected industries, such as restaurants and entertainment venues, the reality is that a lot of companies did not survive. These unprecedented times saw a large increase of small business owners struggling to stay afloat in hopes of a turnaround that ultimately took too long to come about.

Despite short-term relief funding programs made available by federal and state governments, there has been a significant increase in small business closures beginning in mid-2020 and continuing to this day. One of the many obligations business owners are required to undertake when closing their company involves a formal discharge and dissolution filing with the IRS.

There are several filing forms involved and depending on the existing documentation, owners may need to engage with a certified business appraiser to independently declare a final value for tax purposes. Even though it is evident that little to no revenue is being generated from business operations, there likely remain certain assets and liabilities which need to be declared as part of these final steps.

As painful as it may be, a business appraiser will need to be engaged and review these documents as part of their work effort to establish a fair net value for the remaining tangible and intangible property. Essentially, the focus is on what remains of the business that can be resold as part of the closure.

In many cases, this would be tangible property only, such as real estate, buildings, machinery & equipment, and personal property. If these assets have recently been appraised or are reasonably depreciated and accounted for on the company books, the business appraiser can use this data to document under an Asset Approach to value. This approach will likely be the only one utilized given the lack of income and external market comps considered under more normal business valuation circumstances.

Other factors will be taken into consideration that pertain to the closure status which will hopefully soften the final blows that come with this process. Making the decision to close your small business for lack of profitability, or for any other reason, can be a heartbreaking experience, and as business appraisers, we will do all we can to facilitate this process for small business owners during these trying times.

Tags: business valuations, business appraisers, Appraisal for Tax Purposes, closed business

What to Prepare For if Your Business is Being Acquired

Posted by Business Valuation Specialists LLC on Dec 20, 2021 7:00:00 AM

Business Valuation Appraisal Acquisition Preparation

When your small business is targeted for acquisition, it can be both an exciting and stressful time. It is important to prepare for this scenario as you grow your company, so when the day arrives, you have the tools in place to facilitate the process. Here are a few tasks to consider updating now to prepare:

Organize Your Business Documents

The acquisition process is lengthy, but it will go smoother if your financials, taxes, and transactional records are in order. Both hard copies and electronic files need to be organized so a third party involved in the due diligence can easily access everything they need in support of the sale. Make sure all taxes, insurance, and benefits are up to date. Sort through all historic company documentation to ensure it is consistent with the preliminary data provided to the acquisition team. This will save weeks and potentially months of time and minimize any red flags that otherwise would be raised during this stage of the deal.

Obtain Pre-Acquisition Appraisals and Update Them With the Collaboration of the Parties

Before you dive deep into a potential sale, have appraisals completed on your business, equipment, and real estate. A valuation effort will be completed internally by the acquisition team based on the data you provide them, however, suggest an updated business and tangible asset appraisal be performed by a certified and accredited valuation firm. This will leave little to no doubt as to the current market value of your company and can be used for other purposes in the immediate future.

Find Trusted Partners

It is difficult to go through an acquisition by yourself, so make plans to identify trusted consultants who can assist you during the process. Business attorneys, appraisers, tax advisers, and investment bankers are some of the contacts you want to develop in advance of an acquisition. These partners can help you manage your expectations and take some of the burden off you while positioning your business for a successful sale.

Complete Your Own Due Diligence

While third parties can help you understand the market, you should consider doing your own research to better plan and understand the strengths and weaknesses of your company. Review recent transactions in your industry and identify trends. Try to determine the best type of company to acquire your business as a stand-alone operation or part of a larger firm.

Get Stakeholders and Employees on Board

While you may be ready to sell, not all company personnel and current investors will understand the decision. The process will run smoother if you communicate clearly to all parties affected by the transaction. Personnel and clients are part of the overall value of your business. By retaining these relationships going into the sale, you can avoid infighting that might sabotage the deal.

By taking these steps before an acquisition, you can properly position your company as the right fit for the acquisition firm, while navigating every step of the process with confidence and ease.

Tags: Business Appraiser, business valuations, acquisition, preparation

Valuing Businesses in the Months and Years Ahead

Posted by Business Valuation Specialists LLC on Oct 25, 2021 7:00:00 AM

Business Valuation Future Value

As we move closer to the “new normal” for business operations in the aftermath of COVID-19, there will be challenges that face both owners and their service providers as to how they adjust their thinking both short and long term. Some of these questions involve the following:

  • Should our employees continue to work remotely or come back into the office?
  • Will the effects on revenue, good or bad, continue, or was this a short-term blip that will disappear in the next year or so?
  • If I want to sell or buy a business in this changing marketplace, what should I consider differently than before?
  • How can I take advantage of new opportunities created out of the changing business model?

Regardless of what opportunities or challenges you face today, it makes sense to consider an updated business appraisal as part of the next steps in your ongoing process. It may be that as a potential buyer of a business affected by the pandemic, you see an opportunity to purchase at a distressed value with the plan to reorganize and create efficiencies that will turn the company around in the near future.

On the flip side, if you are compelled to sell your company in the next year, you may need to consider discounting the value of the business and provide seller-assisted financing as part of the negotiation to incentivize a potential purchaser.

Much of the decision-making needs to be weighed against how short or long term your timeline is with taking these next steps. If you have the time to wait out the aftereffects in the hope of normalization, that might make more sense than determining an immediate course of action with many industries still impacted by the pandemic. Not every business owner has this luxury, however, and the need to make sound decisions with several unknowns still out there may require the assistance and guidance of objective third parties that can provide additional perspective on the state of your company.

From a valuation perspective, your research should lead you to engage with a certified business appraiser, with the expertise and experience to determine your company’s current value. These appraisers may have differing opinions as to the factors that will affect value the most, based on their understanding of your financial data and the marketplace itself, so ensure you have preliminary discussions with them before you decide the best fit.

Speak with your accountant as well, who may be able to provide insights into the best approach to working with an appraiser. In summary, the challenges ahead may be many, so try to gather the support you need to make the most informed decisions possible as you navigate the “new normal”.

Tags: Business Appraiser, business valuations, business appraisal services, future value

What is the Importance of the NACVA to You & Your Business Appraiser?

Posted by Business Valuation Specialists LLC on Oct 11, 2021 7:00:00 AM

Business Valuation Certified Valuation Analyst CVA

When you're considering having your business appraised, your research will likely lead you to the NACVA (National Association of Certified Valuators and Analysts), which provides a wide range of services, including certifications, for business appraisers. This designation can make a big difference when it's time to have a company appraisal performed. Here's a summary of what the NACVA is and how appraisers become certified.

Prior to the formation of NACVA, the methodologies used by these appraisers, accountants, and other business professionals followed a wide range of approaches and analyses. There was no consistency in these procedures which ultimately led to scrutiny and doubt as to the reasonableness, reliability, and independence of the conclusions. When audits were performed on a number of the businesses involved, it was determined that formal guidelines and procedures were needed to govern the valuation industry.

In 1990, the NACVA was founded to implement and support the business marketplace. It developed and tested methodologies for estimating business value under a wide range of circumstances. Over time, these methodologies were accepted in accounting, legal, insurance, financial, and tax circles, and were determined to provide the most accurate picture of business valuation. The NACVA has certified thousands of financial and accounting professionals, including CPAs and valuation specialists. The majority of that membership is certified in one of the Association's three main programs: Certified Valuation Analyst or CVA, Accredited in Business Appraisal Review or ABAR, or Master Analyst in Financial Forensics or MAFF.

The independence and consistency of the methodologies required to be considered and implemented in every appraisal under these guidelines have been critical to establishing a strong reputation of integrity. The business appraisal will also include insights into your company's performance and operations, strengths and weaknesses as well as the position within specific markets and industries you focus on.

Becoming a Certified Valuation Analyst within the NACVA involves a combination of education, experience, and formal testing, that takes years to earn. This designation gives the appraiser direct access to the resources of the association and requires them to follow the methodologies and approaches approved within. Continuing education is also a requirement to stay current with changes and updates to the program.

By being aware of what the NACVA is and how its certified appraisers can bring added value to your business, you can use that knowledge and the quality of their reports as leverage at the negotiating table. Working with a certified appraiser ensures that your business valuation has been determined using standardized methodologies that will stand up well to strong scrutiny in a wide range of areas, including legal, insurance, financial, and tax circles.

Tags: Business Appraiser, business valuations, business appraisal services, NACVA, CVA, business valuation certification

How Much is the Business Your Running or Buying Worth Today?

Posted by Business Valuation Specialists LLC on Sep 27, 2021 8:00:00 AM

Business Valuation Appraisal Appraiser Business Sale What Is It Worth

Whether you want to buy or sell a business, you need to know how much the company is truly worth. To understand this more accurately, you will need to engage in a formal independent business valuation, preferably completed by a certified appraiser. There are various approaches for determining value when performing a business appraisal, and the valuation professional can assist in understanding the best methodologies for the business involved. Here are some of the ways an appraisal is analyzed:

Market-Based Approach

For an active company, a market approach can be one approach that measures fair market value and overall position in a competitive environment. Within this approach, there are different methods to consider, including those for public and closely-held businesses, as well as basing it on a multiple of gross revenues or discretionary earnings. Depending on the specifics of the business, one or more of these approaches is utilized and weighed in the analysis

Income-Based Approach

An income perspective can be useful to value companies of all sizes and is particularly effective for firms that operate with a capital investment intensive structure. One method within this approach is the Discounted Cash Flow method, in which an appraiser gauges future revenue five years down the road, and discounts this to determine the present value and ultimately a fair sale price. This can be beneficial for companies that experience varying levels of cash flow and earnings each year.

A second method under the income approach is called Capitalization of Earnings and uses EBITDA (earnings before interest, taxes, depreciation, and amortization) to estimate a single point-in-time value for the company using its cash flow. This method can best work for operations that experience steadier cash flows and have demonstrated consistent growth.

Asset-Based Approach

This approach focuses primarily on the tangible assets of the business while making adjustments to the company’s book values and goodwill in an effort to estimate value for firms with high levels of capitalized investment, such as real estate machinery & equipment and personal property.

There are certain methods that can work best within this approach, with an initial focus on depreciated book values while adjusting for current market value using tangible asset appraisals to complement the business valuation

In summary, the business appraiser considers and weighs these approaches that factor tangible and intangible assets, revenues, profits, markets, industries, and all other relevant components into the equation, to reflect the overall value of the company. The appraiser may ultimately determine only one approach makes sense while in other instances utilizes several into the appraisal analysis to ensure the most reasonable conclusions.

Tags: Market Approach, Income Approach, Asset Approach, business valuations, business apppraisal, how much is a business worth

How to Set a Price When You Want to Sell Your Business

Posted by Business Valuation Specialists LLC on Sep 13, 2021 8:00:00 AM

Business Valuation Appraisal Set Price Business Sale

If and when you start the process of selling your company, the determination of the right price is a critical component. How do you determine a reasonable figure that recognizes all the factors that make up value, including sales, profit margins, marketplace, industry, employees, capitalized investments, expenses, and all the hard work you have put into it over the years? What about the timing? Are you in a hurry to liquidate or do you have the luxury of waiting for several months or a year to find the right buyer?

Here are a few important considerations to take into account that will help get you started:

Don't just base your asking price on recent comparable sales in your local or regional area. Every business is different, regardless of its similarity to other companies. Yes, you should take time to review these as a possible source, however, there are likely differences to consider, including reputation, goodwill, number of years in operation, annual sales, location, and other factors that can affect the overall valuation of your particular business.

If you're thinking about selling your business within a short timeline, 60-90 days, for example, you likely won't be able to realize 100% of the fair value. You may need to settle for a lower price given the limited exposure in the market and less interest generated as a result. Unless you can afford to extend the marketing plan for a longer period, you will need to temper your expectations and adjust the price you are willing to accept in this scenario.

Is your business in a specialized market? How many potential competitors or investors in your industry can you think of that may have an interest in acquiring your company? This factor can work both for and against you. For example, if you are one of several similar businesses in your marketplace, you may be able to quickly find a potential buyer, however, the price level may not be as high or negotiable as you would like it, given the number of competitors. On the flip side, if you have a unique operation that only a few other companies may show an interest in nationwide, you can take advantage of the specific intangible value your business will bring to a buyer but it could be a more difficult negotiation trying to place a value on the many variables at play.

Regardless of where your company falls in this framework, it is important to obtain an independent business valuation to arm yourself with a supportable unbiased assessment you can disclose to buyers at the right time. This step should be taken as early as possible to better enable you to understand the right approach to setting a price to sell. A business appraisal also provides you with insights into your business, including areas that need improvement as well as the strengths that drive value. You may even want to take the time to make certain changes in company structure as a result of the valuation and then determine the right time to go to market. A business appraiser can also provide insights into the current market and industry, which may influence your timing and decision-making.

By considering these factors before entering the resale market, you can determine the best approach to selling your business at the right price.

Tags: Business Appraiser, business valuations, selling a business, appraisal, how to price a business for sale

What to Know if You Need a Small Business Valuation

Posted by Business Valuation Specialists LLC on Aug 30, 2021 8:00:00 AM

Business Valuation Appraisal Appraiser What To Know

The definition of a small business will vary depending on who you ask or where you research the term. Based on the number of employees, owners, investors, annual revenue, profit margins, and specific marketplace a company competes in, your operation may likely fall into this category. The fact is that the majority of companies today are considered small businesses, especially when compared to the conglomerates who have taken over large market shares in recent years.

The Small Business Administration (SBA) has a broad definition, which varies greatly based on the overall industry and company structure. This has benefited many who have worked with the SBA on start-up or refinancing opportunities, as well as the related services this organization provides to business owners. Regardless of the definition, if you're considering getting a company valuation as a small business owner, you're making a prudent decision to independently assess where you are today and preparing for the future.

One of the primary reasons small businesses need an appraisal is when considering a sale or change in ownership, such as a transfer to the next generation in the family. In this example, the departing owner wants to realize a fair value independently of any subjective opinion within the family. The relative taking over the business wants to be comfortable that they're not paying too much during the transfer. The formal valuation process creates an effective tool to help both sides realize a favorable outcome.

The appraisal process begins with a review of a company's finances while completing a questionnaire that provides the valuation professional with the data needed to consider the history and future plans of the company. The next steps involve reviewing the industry to determine how your company fits into the broader marketplace. Is it currently growing or stagnating? It's important to know how your company has been doing historically in the market, but also critical to look toward future long-term viability.

A small business appraisal is a valuable tool that can be used to improve your company's operation while gaining a realistic understanding of its current value. Ensure that you engage with a certified business valuation professional with at least 5-10 years of independent experience, so you can capitalize on their insights.

Tags: business valuations, business appraisal, how to value your company, small business valuation services

Importance of a Business Appraisal During an Acquisition

Posted by Business Valuation Specialists LLC on Aug 16, 2021 8:00:00 AM

Business Valuation Buy Sell Acquisition

Valuation is essential during an acquisition, regardless of which side of the deal you find yourself on. The acquisition process can be lengthy, and there are several things you will need to prepare for, including engaging a certified appraiser to complete a current valuation of the business.

Documents at the Ready

On the seller side, the overall process will go more smoothly if the company’s financial statements, taxes, and related business documents are organized and ready for review. This will give the buyer the utmost confidence that they are making the right decision moving forward with the transaction. It will also create an efficient and effective transition.

These steps greatly assist in the appraisal process as well and can ensure the valuation is being analyzed with every piece of data available.

Work with Trusted Associates

You can't go through an acquisition alone, so before you seek buyers, find the right people to help you through the process. This may include a business lawyer, a tax adviser, a financial professional, and a certified business appraiser. These partners can help you manage expectations throughout the acquisition process and take some of the detailed busy work off your plate.

While your associates are assisting you, take the time to do your own research to better understand the market and how your company fits into the larger industry picture. Seek to view the transaction from the buyer’s perspective. This may include a review of any similar deals in your markets and other companies that commonly acquire in your industry.

Don’t Put Off the Appraisal

As a business owner, you are probably a little biased in calculating your company's value. You may be emotionally attached and not looking at the situation objectively. An independent valuation of your business will help you see things subjectively, so you can better understand a realistic range of value in the current market. Review the appraisal carefully and don’t be afraid to ask questions about the valuation. When you understand why your company was appraised at a certain price and what factors affect value, you will be a stronger negotiator.

In summary, by taking these steps before an acquisition, you can put yourself and the company in the best position possible, while navigating each step of the acquisition phase with confidence, thus maximizing the chance for success in the ultimate transaction.

Tags: Business Appraiser, business valuations, selling a business, appraisal, buying a business, acquisition

What is EBITDA? How Does it Measure Your Company's Financial Health?

Posted by Business Valuation Specialists LLC on Jun 21, 2021 8:00:00 AM

Business Valuation Earnings Before Interest Taxes Depreciation Amortization

When you're trying to determine the financial condition of your business, there is a wide range of formulas and techniques available. One key measurement is calculating earnings before interest, taxes, depreciation, and amortization (EBITDA). What exactly is EBITDA? Here's an inside look at how this figure is calculated and utilized in measuring the financial status of a business:

A Breakdown of EBITDA

The components of EBITDA consist of:

  • Earnings: This refers to net profit, or the total revenue of your company less expenses and overhead.
  • Before: The earnings before additional deductions are considered.
  • Interest: Interest represents the cost of any loans and similar financial instruments your business has on the books.
  • Taxes: This typically refers to income taxes only.
  • Depreciation: Depreciation represents how much capitalized value you deduct for your fixed assets over a particular time period. It is typically determined using acceptable accounting standards such as the Modified Accelerated Cost Recovery System (MACRS) or through an updated valuation of your company’s tangible property (equipment and real estate).
  • Amortization: Amortization is the reduction of business debt, such as loans and alternate types of financing over a given period.

As a general rule, EBITDA is a measurement to determine a company's profitability, or cash flow, however, it may not fully represent cash earnings. EBITDA considers a wide range of factors that come into play with business finances. It is not a universally accepted accounting measurement, and, therefore, has some flexibility with how it is calculated and measured.

From an application perspective, it is used by banks and financial services companies to estimate debt servicing levels. It is also commonly used to compare similar businesses within an industry or market and as a tool to preliminarily estimate a company’s current value using multiples of EBITDA.

A similar calculation that provides the same basic information is the earnings before income and taxes, or EBIT. The difference with this measurement is the exclusion of depreciation and amortization. When these variables are removed from the calculation, it represents the company's operating profit vs. overall cash flow.

With an understanding of how EBITDA is measured and utilized, you can gain a better understanding of how your company is viewed in the industry and its overall financial health. It is always optimal to have a more detailed independent measurement of value completed for your company, especially if you plan to sell, expand or refinance debt. A certified business appraisal will provide you with the overall value of your company, as well as information on the market, industry, competition, and the strengths and weaknesses of your company.

Tags: business valuations, appraisal, business valuation appraiser, EBIDTA, Financial Health

How Valuing a Retail Business Helps You Navigate Shrinking Markets

Posted by Business Valuation Specialists LLC on May 10, 2021 11:00:00 AM

Business Valuation Retail Industry Shrinking Markets

When your business is within the retail sector, consumer confidence and market uncertainty can make all the difference in whether you are operating in the red or the black. But how do you adapt to changes in the market? One option to consider is a business valuation today so you can plan for the future, focus on your strengths and avoid the potential pitfalls of this industry. You can then adapt to changing market conditions and position your business to take advantage of the high points in the market while riding out the low ones.

Many people only consider obtaining a third-party business valuation when they are looking to buy or sell. The benefits gained during a retail store valuation now, regardless of your future plans, can provide you with valuable insights into your operation, and a better understanding of your overall assets and liabilities. This, in turn, gives you the tools you need to get your business through the difficult times while taking advantage of growth opportunities in the good times.

As an example, regardless of the timing, it is likely that your business has recently squeaked through an economic downturn as well as seasonal upswings in sales. Based on your experience, you would now like to consider growing your business by adding a new location or merging with a competitor that hasn't fared as well. In preparing to manage the due diligence process, you need to know what your business is worth, whether it's to secure the financing and investment you need, or to know where you stand in comparison to competitors. By learning this information, you can better negotiate the terms involved in the potential transaction.

The certified independent appraisal report you receive should have all information you need including a report on your market sector as a whole and its anticipated growth or loss in the upcoming years. A look at your competitors should also be included, detailing how they compare to you in the market. Your assets and liabilities are reviewed, giving you valuable insights into the areas you may need to upgrade or replace that are inefficient or even failing.

As a result, you may see innovative approaches to customer support that strengthens your business' overall stance in the market sector. The appraisal may even help you look at your online presence and level of digitization, as well as how that capability is expected to allow your business to expand into new markets.

In summary, you'll have the supporting documentation you need to get that loan for a new location opening or to improve and expand your existing business processes. You can make smart, informed decisions on what needs to change in your company to boost its performance and see where you should continue to invest for future growth. Obtaining a retail business appraisal from a certified experienced valuation firm is one of the best ways to gain these insights into your company which, in turn, will provide options that allow you to adapt to meet changing market demands.

Tags: business valuations, business appraisal services, retail business, valuing a retailer, retail industry, shrinking market