Business Valuation Blog | Understanding Buying / Selling a Company

When you're getting ready to wind up your professional life, a common question is "How do I sell my business to maximize my profits?" It's a tough question, with many factors feeding into the final figure you receive for the sale of your business. But by following the steps we've listed below, it's much easier to make sure your company sells for an excellent price and helps secure your financial future, whether for retirement, a new venture or to save for other goals down the road.

How to I make the most profit when I sell my business?

1. Start early. Trying to rush the sale of your business means you're going into the process ill prepared to provide paperwork for potential sellers, you won't know the weak points of your business and you won't be able to negotiate from a point of power because you know exactly how much your business is worth. Take your time to get everything completed before you start the sale process.
2. Get your paperwork in order before getting the valuation of a company. You'll need to get your accounting up to date, gather three to five years of tax returns or financial statements and make sure any other regulatory paperwork has been completed and filed. It's much easier to get everything together at this point instead of trying to find it after you have an interested buyer looking at your company.
3. Get a business appraisal completed early in the process. Because a business appraisal allows you to see your company's overall condition, you can use it to determine where you are strong - great selling points for your buyers - and where you are weak and need improvement.
4. Use the company valuation to strengthen your company's weak areas. Now that you know where the weak areas are in your company, take corrective action. Take care of any issues that could cause problems with your sale and go from there.
5. List your company with a business intermediary, if needed. Your company valuation will give you a strong backing for your asking price.
6. Use your business valuations to negotiate the sale from a point of strength. Once you have a solid buyer and a couple backups lined up, you can negotiate for a higher price because the business valuation backs it up.
7. Close the sale. Your business valuation helps your buyer get the financing they need to quickly close the sale and get you your money from the proceeds.
8. Talk with a finance expert to keep as much of your money as possible. They can advise you about investments, avoiding tax issues and can help you preserve your profits.
9. Spend time helping transition your business over to the new owner. This also helps build your business value to the buyer.

Now that you know how to maximize profits when you decide, "It's time to sell my business," it's time to start taking action. Plan on having a business valuation performed at the earliest opportunity, work through the process and get ready to make a profit off your business. If you still need to set up business appraisals to get your sale process started, why not contact the highly-trained professional appraisers at Business Valuation Specialists. We're happy to help you make the most of your business sale.

When you seek financing to purchase a business, it is natural for the lender to take steps to ensure that the deal is sound. After all, if the business is not financially viable, you will not be able to make financing payments on time. Often, banks require that independent valuation firms perform a business appraisal before the loan closes. Learn what it means to work with a valuation firm before getting a loan to better understand this important part of the business financing process. 

Is a Company Valuation Required for a Bank 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), they will often require an appraisal. SBA loans cannot exceed the appraised value of the business plus any real estate or equipment. Accordingly, if the SBA is lending you $125,000 to buy an auto service business, they will want to make sure that the auto service business is worth a minimum of $125,000.

The SBA has set out their own guidelines regarding business valuations. Other lenders may have similar guidelines for business appraisals prior to financing approval. 

Buyers can get stressed about having a business appraisal done, because the numbers need to match for financing to be approved. In the event that the hair salon appraises at $110,000, the bank may refuse to loan the additional $15,000 needed to meet the purchase price. The buyer could then decide to raise the funds elsewhere, use personal money to make up the difference, or not proceed with the transaction. 

Ultimately, the appraisal protects your interests as a buyer in addition to the bank's interests as a lender. It would not make good financial sense for you to spend $125,000 on a business that only received a valuation of $100,000, would it? It is better to know the appraised value before you buy. 

What Happens During the Business Appraisal Process?

The bank may select their own valuation firm to do the appraisal or have you select a firm. Either way, the next step is for a qualified appraiser -- someone with accredited appraisal training and knowledge of the business niche -- will perform independent research on the business and review business documentation to estimate the valuation of a company. 

The appraiser will select from commonly used business valuation methods, such as the asset approach, income approach, and market approach. 

As a business buyer, there is not much you need to do to support the appraisal process. The business seller will work with the appraiser to furnish the documentation needed to get a business valuation. It is in the seller's interests that the appraisal meet their price too, since they want the deal to close. 

When the business valuation firm concludes their appraisal, they will provide the engaging party with the report. You may also need to get a real estate or equipment appraisal completed as well which are separate reports.

If you are buying a business and are told a valuation is needed, don't worry about it. It's a standard part of the financing process, not something to stress over.

If you are having a company valuation done, then the term EBITDA will come up at some point during the appraisal. EBITDA is one of the many factors that an appraiser looks at when it comes to how to determine the value of a company. Learn what this acronym really means and how it affects your company's value now to better understand the appraisal report. 

What is EBITDA?

EBITDA refers to earnings before interest, taxes, depreciation, and amortization. Appraisers use this term as shorthand to refer to the basic business profitability before these other elements are taken out. Since EBITDA looks at just earnings, it gives appraisers a quick way to tell the financial health of the business during a business valuation. EBITDA does not represent the real cash value of the business, but it can help the appraiser determine what amount of debt the business is carrying and how easily the business can pay this off. 

EBITDA is not the only indicator of your company's value - and, on its own, it is not a very useful figure. Once an appraiser has calculated your company's EBITDA, they account for depreciation and amortization to get a more accurate picture of your business's cash flow. 

Once all these calculations have been made, an appraiser has a representation of your company valuation in terms of multiples of EBITDA. In business appraisals, the appraiser might say that your company has a worth or value of "5 times EBITDA" if your company is worth $5,000,000 and your EBITDA is $1,000,000.

The stronger your financial health, growth estimates, and market dominance, the more attractive it is to potential buyers thus multiples are typically driven higher. For this reason, it can be helpful to get an understanding of your EBITDA if you anticipate selling your business down the road. By making business adjustments that improve your EBITDA, you can improve your company's financial health and command a better selling price when you are ready to sell.  

Considerations for using EBITDA

While you can calculate EBITDA yourself, taking proper adjustments is tricky. A business appraiser knows how to work with EBITDA to account for intangible variables. An appraiser can also make sure that one-time expenses and other items are accounted for properly. For example, acceptable tax practices, like writing off one-time repairs, can actually hurt EBITDA. These are not calculations the average business owner can make on their own. 

Since EBITDA calculations and adjustments can be confusing, it is a good idea to work with a business appraiser to calculate the value of a company. Too often, business owners can incorrectly apply a concept like EBITDA and end up with an incomplete value of the company as a result. In a worst case scenario, this could affect the business sales price by causing an owner to accept a lowball offer or sabotage a deal if the owner thinks the business is worth more than it really is. Proceed with a business deal with confidence by hiring an appraiser to determine EBITDA as part of a business appraisal. 

While there are rules and regulations regarding business appraisals, there is a degree of subjectivity involved in taking a company valuation. Each appraiser reviews the data and puts it together to portray the overall value of a business. To ensure that your business appraisal really reflects the worth of your company, you need to find an appraiser who understands the trends in your industry. Here's how to make sure that you pick the right business valuation consultant for an appraisal.

Review the professional expertise of the individual 

There is a fine line in business appraisals: You want to hire a business valuation specialist who has relevant industry experience, but not at the expense of experience in appraisals. Review the professional experience of any appraiser and ask to see a list or appraisals they have done by industry. When considering a business valuation firm, check what specialties other appraisers in the firm have. Even if you are working with one appraiser from a given firm, he or she may run questions by colleagues. It is in your best interest to make sure that all parties at a consulting firm have the appropriate experience. 

Ask about methodology 

In a worst case scenario, an appraiser could mis-apply a rule of thumb from one industry (such as a law firm) to another (an engineering firm). This could result in a valuation that is over- or under-inflated. When you ask an appraiser about their methodology, listen to what they say and how they say it. An appraiser should be able to explain what methodology they will use and tell you what a particular term means in plain English. If an appraiser cannot articulate how they will appraise your company, do not hire them. 

Check for credentials 

Before you hire an appraiser, it is worth checking to make sure that they have credentials that show expertise. Any appraiser you hire for a business appraisal should have a professional credential from an industry organization such as the National Association of Certified Valuators and Analysts or the American Society of Appraisers. These credentials demonstrate that an appraiser has the proper knowledge to take the valuation of a company, and takes continuing education courses to maintain professional relevancy. If you hire an appraiser who does not have these credentials, then you risk getting a business appraisal that uses incorrect methodology and does not accurately show company value. 

Whether you are seeking an appraisal in the hopes of buying a company or selling a business, establishing a credible fair value is in everyone's best interests. Since a business appraisal can affect the value of your company on the market, and thus the amount you will make in a sale or merger, it is important to spend time selecting the right fit person to perform the appraisal. Time spent interviewing potential candidates, and selecting the right person, results in confidence in their professional credentials and in the ensuing appraisal. This is not a decision to rush through. Since the appraiser should be involved early on, so as to have enough time for decision making, start looking for a qualified business appraiser before offers are on the table. 

To learn more about our services, or to schedule an appraisal, we invite you to contact us.