Business Valuation Blog | Understanding Buying / Selling a Company

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.

When you seek financing to purchase a business, it is typical that potential lenders will require an independent valuation to ensure the deal is sound. They want to confirm the sale price is reasonable and the business itself is financially viable, to mitigate the risks involved with the investment. Learn what it means to work with a reputable valuation firm to better understand this important part of the loan approval process.

Is a Valuation Required for a Business Loan?

Many lenders require that you have a company valuation performed by an appraiser. If your loan is backed by the Small Business Administration (SBA) or a similar government-backed program, they will often require an appraisal. SBA loans cannot exceed the appraised value of the business, inclusive of any real estate or equipment assets being acquired as part of the sale. Private bank lenders will have similar guidelines for business appraisals for financing approval.

As the buyer seeking the loan you should have additional money-raising plans in place, should the appraisal come in lower than the purchase price of the business. You can decide to raise the funds through private equity, use personal capital to make up the difference, or even go back to the seller and renegotiate the sale.

Ultimately, the appraisal protects your interests as a buyer, as well as the bank's interests as a lender. It may not make financial sense to purchase the business at a premium above what it’s worth unless you have ulterior reasons for doing so. For example, in a seller’s market, where there were other bidders involved in the sale process, or if you needed to acquire the business as part of a growth plan. Either way, it is better to understand the true market value of the business and have all financing options in place before you close the deal.

What Happens During the Business Appraisal Process?

The bank may select their own valuation firm to do the appraisal or have you select someone. In both cases, ensure the appraiser is certified, with sufficient training, knowledge, and experience to adequately complete the valuation. The appraiser will perform independent research on the business and review your documentation to estimate the worth of the company. They will rely on commonly used methodologies, such as the asset, income, and market approaches.

As the buyer, you will need to facilitate the process of working with the seller, lender, and appraiser to ensure the documentation needed is available and accurate based on your prior due diligence review. It is in the seller's interests that the appraisal meet their price too since they want the deal to close.

Once the valuation is completed, a report will be prepared and submitted to the lender, who will distribute the report to the appropriate parties. As a buyer, you should review the report to better understand the valuation of the business and its associated goodwill and tangible assets. You may also want to consider using the report to assist in insurance, tax, and accounting purposes.

In summary, you can rest assured that if an appraisal requirement coincides with you obtaining the best financing option for your new company, Business Valuation Specialists LLC will be there to guide you through the process efficiently and effectively.

When you're selling a business to a third party, the topic of appraisals may arise. But why is it important when you're selling your company, and what difference will it make at the end of the day? A formal valuation of your company is one of the key components that drive the transaction. Here's why:

Why Business Valuation is Important When Selling a Business to a Third Party

When you're planning to sell a business to someone you don't know, you want to make sure everything is done fairly and equitably. Completing an independent, certified, third party appraisal early on is the first step to ensuring this happens. By having an appraisal performed, you can see where your business needs improvement, and learn where it is already strong so that you don't have to put further effort into areas that are already in great shape. Once you've made changes and improvements in those areas that required them, your business should increase in value, allowing you to realize the benefit from your actions and detail these updates to potential buyers.

If you're like many business owners, you know that your company should be worth more than the assets on the balance sheet, but may not know exactly how much more. By having a certified business appraisal in hand, you have a better idea of what that figure should be, and can consider offers that are reasonable while dismissing those which are not. You can also decide if you want to ask a price that is in line with similar businesses in your market or if you feel you have a unique position that should be accounted for, ask something higher for that consideration.

Having a formal business valuation helps you at the negotiating table. Because a certified appraisal is based on accepted standardized methodologies, it represents best appraisal practices and procedures, and can also be useful in legal, insurance, and financial circles. If you want the potential buyer to come up in price, providing them with a copy of the appraisal report may make them aware of facts and circumstances about your business they may have previously been unaware of. This gives them a legitimate supportable reason to either change their initial offer or meet a counteroffer you've proposed to them during negotiations.

Business appraisals are vital to your success when selling a business to a third party. If you're getting ready to sell your business and haven't contacted a business valuation firm, please feel free to contact us today. Our qualified business appraisal specialists are ready to help you get the maximum benefit from your business sale.

If there's anything certain in business, it's that dealing with the government is probably going to take longer and be more complicated than you'd like. There are, however, several agencies that help small businesses, including the Small Business Administration (SBA) and the United States Department of Agriculture (USDA). These agencies offer popular loan programs with great rates and flexibility while working with your local banks to get you the financing you need to grow your business. Local banks oftentimes receive guarantees from the SBA and USDA that loans will be paid back to the lender if the business fails. For most of the loan programs, these federal agencies require a business valuation be performed as part of the approval process.

How can a business valuation help secure an SBA loan?

• A business valuation performed by a certified business appraiser ensures that the valuation has been performed independently with no bias while using accepted methodologies. This means that you will receive an accurate picture of your company's value and the SBA understands the loan they are guaranteeing is being measured against your company’s current worth.
• Business owners sometimes make the mistake of basing their company's value on tax accounting records. Though these documents are accurate and useful, they don't specifically reflect the appraised value of the business. A review and analysis of your tax returns and financial statements over a 3-5 year period will be better suited to properly value your business.
• Having an appraisal performed also helps you understand what condition your company is in. There won't be any surprises when you go to pay back the loan and realize there's an issue with your cash flow, industry position, expected income or similar concerns. You'll know where your company is strong and where it needs improvement. A business appraisal gives you a solid look at how your company is performing and where you need to invest more time and effort.
• SBA guidelines allow lenders to perform their own company valuation if a loan is for less than $250,000 but requires an independent certified appraisal if the loan is higher. You may want to complete a business valuation regardless if you believe the bank doesn't have a solid grasp of your business or industry and is limiting the loan terms, or you just decide it prudent for other business considerations.

By having a business appraisal performed on your company, you're doing more than just ticking off a box on a checklist, you're finding out valuable information about the health of your company's financial situation. Business Valuation Specialists is ready to help you.

When you want to sell your software company or need a better understanding of the value for business you have worked so hard to build, you need to consider an appraisal. The software industry differs from most others, so how does this factor into a business valuation? Understanding the methodologies involved with the appraisal of your software business can help you make sense of the current market and your place within it.

There are two main approaches to value within the business appraisal world: the income approach and the market approach. Both can be used to value a software company, and a business appraiser will select the best method depending on the reasons for appraisal and the data available for analysis.

For the income approach, an appraiser focuses on the current and future benefits of your business in terms of revenue and expenses. They will utilize this information and discount it in present terms. This is referred to as a discounted cash flow (DCF) of your business.

This approach is appropriate for companies that bring in an unstable amount of earnings from one year to the next, or companies that are not growing at a consistent rate. Since many software companies do not grow at a steady pace, and commonly see material fluctuations for revenue and expenses, an income approach makes sense.

A market approach can also be used for taking the valuation of a company in the software industry. This is more specifically referred to as the multiples of revenues and earnings market approach. In this method, an appraiser looks at the software company's historic financial statements to determine values. The appraiser then compares the software company's values to its peers.

Factors That Affect the Value of a Software Company

Factors that may affect the value of the software company include among others, tangible assets owned, the replacement cost of the software itself, the value of similar businesses (possibly competitors), customer acquisition cost, and measurable advantages to your products

Since there are many factors that affect the value of your software company, you should know what method an appraiser will use, the factors they consider, and how they put this data together to arrive at your company's overall value. Talk with the appraiser during the valuation engagement to better understand what the appraised value really means.

Three similar types of businesses greatly impacted by the COVID-19 pandemic and frequently in today’s news include day spas, beauty salons and hairdressers. Whether you own a small barbershop providing haircuts and shaves or have a chain of multi-faceted spas offering many types of services, now is the time to consider the current market value of your company.

Obtaining a current business valuation will offer you an advantage if you are considering buying, selling, refinancing or taking advantage of available government incentives provided during 2020. The ability to manage your business efficiently and successfully through these unprecedented economic times thus far is a testament to your entrepreneurial prowess. Now it’s time to look at the next steps of potential growth and take advantage of a market where new opportunities may arise.

A current business valuation is important both for your existing company’s growth plan and for other businesses you may be considering that would complement that growth plan. In today’s challenging economy, understanding the true value of your business will allow you to better recognize and capitalize on opportunities ahead of your competitors. It will also help prevent you from making costly investment decisions. Additionally, once you have obtained a business valuation from a certified business appraiser, and by updating it periodically, you will remain fully informed of current market conditions, enabling you to continue staying ahead of your competition.

A certified appraiser at Business Valuation Specialists will work closely with you as an owner operator. They will walk you through the process and provide insight as to the information needed to analyze the value of your company with past, present and future scenarios considered. Since we are nationwide, our appraisers are in a position to best assess your business within a particular geographic market area and the forces that act upon and within it. Your completed appraisal will therefore give you a powerful data tool when making future business decisions.

When you’re considering obtaining a business valuation to purchase, sell, refinance or buyout an investor in your company, or for any other reason, it makes sense to obtain a tangible asset appraisal to accurately assess the market value for your owned equipment and real property.

Quite often, business owners will have capitalized a significant amount of tangible asset cost as part of their operations for depreciation and tax purposes, however, years later, when it comes to updating the overall company value, they assume the internal net book dollar amount on these assets is a fair representation of actual market value, which in many cases is not accurate and could potentially result in money left on the table.

If a current tangible asset appraisal is not available in a business valuation, the certified appraisers will need to use the net book value of these tangible assets as reflected on the company’s financial statements, as this is the only available source of data. These net book values may be substantially different than the actual market value of the equipment and real property, which would create inequities in the appraised value of the overall business. Having a true understanding of all these important components of your company will allow you to make sound decisions going forward.

When completing a business valuation for any company, it is important to properly allocate the value to both the tangible and intangible assets of the company based on current market conditions, which will then gain you a full perspective on how to approach sale, purchase or refinancing opportunities.

The appraisers at Business Valuation Specialists (BVS) can discuss this issue with you during the valuation process. We have tangible asset appraisers on hand through our sister company Equipment Appraisal Services (EAS) as well as strong relationships with real property appraisers. Obtaining a business valuation appraisal together with updated equipment and real property appraisals will provide you with a full and complete picture of your business’ actual total worth allowing you to make highly informed business decisions with confidence and provide a competitive advantage.

When you need to have business valuations performed, valuation firms provide you with significant insights into your company that can give you a wide range of benefits to your business. But what happens when you're working with a valuation firm? What can you expect from a certified business appraisal specialist? Here's a quick look at what you can expect when undergoing a business valuation.

What Happens when Valuation Firms Work with My Business?

To start with, a quality business valuation company will look at much more than just the basics of your business. A business valuation is more than just a hard look at your business' financial health, it's a comprehensive look at the industry and what affects your business' ability to perform in the market. They'll take a solid look at the risks and rewards that are possible with your company and provide you with a detailed report of what your business is worth along with areas in which it is strong and other areas in which it could be improved. Here are the usual steps taken in the process:

1. Once we're in contact with each other, the valuation specialist will gather the basic information about your business. This may include the type of business, the availability of key information, any potential issues and other ares of importance to the business valuation. The purpose of the valuation is also determined, as particular types of appraisals are required in some specific situations.
2. Based on the initial contact, the business valuation specialist will typically provide a proposal including the timeframe expected for the initial business appraisal report and the cost expected. The appraiser will also request any necessary information for the valuation, including financial data, asset information and additional items of interest to the valuation process.
3. Once this information has been obtained, the valuation specialist can begin to dig into the details. They'll take a look at what aspect of the industry your business falls into and what portion of the market share it holds. Beyond simple information gathering, they'll examine your business' finances, including overhead costs, regularity of income, actual value of assets and similar documentation. Your unique facets of the business will also be taken into account.
4. Using this information, the valuation specialist will develop a business valuation report. This report is created using standardized methodologies and is designed to stand up to strong scrutiny, providing you with a report that will hold up in insurance, tax and legal circles. Once the report is prepared, it will be reviewed with you to ensure that it is an accurate reflection of your business and that any missing details are taken into account. If you are not in agreement with the valuation as presented in the initial report and can provide the additional details needed, a revised valuation report is prepared to include those details as appropriate.

To discover the valuation of a company, valuation firms provide invaluable insights into your business. By knowing the process that's involved, you can better prepare for the process and will know what to expect when a business appraisal specialist develops a valuation report for your business.

Have you ever had someone ask about buying into your company but you don't know what the shares are really worth? Maybe you need to add equity for a serious expansion but aren't sure about how the valuation of a company will affect the share cost. You could be adding new partners who will help build your business but don't know what the share value will actually end up being. When you're adding additional shareholders to your business, you probably have a lot of questions about how much each share will be worth. A business appraisal helps you know your business' true value so you can pass that cost onto your new shareholders.

How Business Valuation Helps when Adding Additional Shareholders

• Assures the existing shareholders of their shares' value. When you add shareholders to a company, your existing shares will be diluted as the new shareholders increase the number of shares in your company. That means your existing shareholders will want proof of the existing value of the business so they know they won't be losing money during the sale of new shares. As an example of this, having 100 shares in your company distribute among two partners means each partner has a half interest in the company. If you're adding two partners and 100 additional shares, suddenly each partner has a quarter share in the business instead.
• Provides a basis for pricing new shares. If you're selling shares, you'll need to determine a price for the shares. How can you accomplish that if you're not sure of the value of your business? By having a company appraisal performed, you can determine the current value of your company before you try to price the shares.
• Provides documentation for new shareholders. When you're adding shareholders, whether as a sale of shares to raise equity or providing a new partner with shares in lieu of cash payment, the shareholders will want documentation so they know what each share is worth. If you can't document the value, how would the new shareholder know that the share is worth the paper it's printed on?
• Ensures you're not undervaluing or overvaluing your shares. Far too many businesses base their business value on a tax return or a balance sheet that may not reflect accurate business values. In tax accounting, assets are often depreciated by having their value distributed across a standardized depreciation table that spans a particular period of time. What if your equipment is worth more or less than its depreciated value at that time? At the same time, basing your business value on the sale price of similar businesses in your area may not reflect an accurate value either. A proper business appraisal will.

Adding additional shareholders to your company can be stressful, so don't make it any more stressful than it needs to be. By having a company valuation performed to determine the value of the shares, you have easy documentation for your shareholders both prior to and after the addition to verify the sale and cost of shares. If you haven't had business valuations performed on your company recently and need one done to add shareholders, it's important that you get that documentation.

When you're in business, you know that a business valuation can be a great tool for improving your company. But under what circumstances should you get an updated business valuation? Here are ten of the most common reasons to get a business appraisal.

10 reasons for getting a business valuation

1. Transitioning business to family members: Passing your business to the next generation is a great way to maintain a legacy, but you still need to get a fair price for your equity. A business valuation assures that you have documentation of the company's value.
2. Selling a business to a third party: When you're selling your business to an outside party, you want to ensure you get what it's worth. Having a quality business appraisal helps ensure you're not leaving money on the negotiating table.
3. Buying out an exiting shareholder: When one shareholder wants to leave a business, you want to control those shares in some situations. By knowing what those shares are worth, you know what a fair offer would be instead of worrying about overpaying or stripping the business of vital capital.
4. Adding additional shareholders: Have you ever had someone ask about buying into your company but you don't know what the shares are really worth? A business appraisal helps you know your business' true value.
5. Estate planning and taxes: If there are only two constants in our world, it's death and taxes. In the case of estate planning, knowing what your business is worth allows you to plan for the inevitable taxes that are to come, so that you can ensure your legacy lives on.
6. Key person insurance: What would happen if your partner or other vital part of your business passed away or was disabled and unable to work?  A business valuation helps prove what their contributions to your business actually are.
7. SBA loan guarantee: When you need to get an SBA loan, you'll need to document what your business is actually worth.
8. Strategic planning: A depreciation schedule may not show the true value of your assets, and if your balance sheet hasn't been adjusted for a variety of possible changes, you may be taking a larger risk than you'd intended. An up to date business valuation helps you make better business decisions with good information.
9. Buying a business: When you're considering buying a business, you want to make sure there are no unpleasant surprises waiting in the books or the market. Because a quality business valuation looks at potential income, market conditions and similar concerns, you can rest assured that you're making a good investment.
10. Litigation: Nobody likes being sued, plain and simple. When you're going through litigation, whether it's a divorce, injury case or any other type of court case, you want to be sure you can prove the value of your business, so that any damages can be based on what your company is actually worth instead of inflated figures from a lawyer's estimate.

As you can see, there are many common reasons business owners have a business appraised. If you haven't had your company valuation performed recently, what's stopping you? Knowing the valuation of a company is a valuable tool.