Business Valuation Blog | Understanding Buying / Selling a Company

Every business has driving factors that determine its success. Key variables that have to work in order to be considered a winner. It’s important to take a hard look at your company and understand exactly which factors drive these outcomes so you can continue to maximize their positive impact on revenue and net income.

What components of your business are making the biggest difference to your bottom line?

Here are some possible drivers:

• Marketing variables such as website optimization (SEO), social media messaging, and a strong sales team.
• Unique product development that sets you apart from your competitors and allows you to provide customers with better pricing and more effective performance.
• Consistent client communications and commitment to the timely delivery of your products and services.
• A strong reputation in the market based on many years of experience, expertise, and proven results.

It might be a combination of these variables, or something even more distinctive, that creates the value added that separates your business from all others in your industry.

As a business owner or leading executive, it is imperative that you have a strong understanding of what these factors are. You can then discuss each one in detail with employees, service providers, and suppliers. Bring in your outside consultants and service providers, such as accountants, financial institutions, and investment advisors, and discuss how these advantages can support future growth and investment.

When independently valuing the business, or when contemplating a merger or sale, inform your appraisal professional and advisors about these success drivers so they can highlight and factor them into their analysis.

Everything may not be black and white, and it may not be easily determined on your balance sheets and financial statements; therefore, it’s vital to create a straightforward way to break down the numbers further and show interested parties how it all works in the day-to-day operation.

In summary, by understanding these winning formulas and knowing how to highlight them in your business model, you will create ongoing opportunities both internally for growth and sustained success, as well as future investment, partnership, and eventual sale.

Whether you own a small business or a conglomerate, many markets and industries have been significantly affected by the pandemic and more currently, the supply chain shortage, resulting in delays of transactions for a multitude of products and services. If your business model has been greatly altered as a result of these unprecedented times, and you are struggling to adapt to the shifting marketplace, consider obtaining a current business valuation to assist in measuring these changes, and developing a game plan for the future.

A certified business appraisal will also provide you a distinct advantage if you are considering buying, selling, refinancing, or taking advantage of available investment opportunities. The ability to manage your business efficiently and successfully, as the playing field changes around you, is critical to the long-term success of your enterprise.

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 mistakes. Regardless of the situation you’re presently involved in, a certified business appraisal will help enable you to make the best decisions on a day-to-day or long-term basis.

The appraiser will walk you through the process and provide insight as to the information needed to measure the overall value of your company with past, present, and future scenarios considered. As you communicate and collaborate through the process, the business valuation expert will determine the best approaches to consider and ultimately weigh, during the appraisal process. Making the most out of an otherwise negative situation, and potentially capitalizing on opportunities in these difficult times, is part of the formula of the successful, and adaptable business owner.

How much is a business worth? This question has plagued business owners for centuries. Unfortunately, the answer to that question, as to so many in life, is that it depends. What are you trying to do with the business? Why are business appraisals needed at that time? Will the current market conditions change the valuation of a company compared to a year from now? How does today's business owner figure out what their business is worth? Here's some quick insight into how a business is valued and the process that is used to calculate that value.

Exactly how do you figure out how much is a business worth?

Determining business value is a complex process. It involves looking at the business' individual practices, market share, goodwill in the community and income levels. It can also involve the market and industry conditions, the urgency of a sale, the perceived value of the company's brand and any number of other aspects that are often dismissed as inconsequential to the business value as a whole.

Part of the calculations are based on why the valuation is needed. If you need a valuation of your business because you're considering expanding and want to make sure you're on solid financial footing first, you'll need a completely different valuation than someone who is having to quickly sell a business to settle an estate due to an untimely death or the dissolution of a partnership or marriage.

Another area that can come into play is the current industry and market. If the business is positioned to take advantage of new technologies or innovations in the industry, the business' value to drastically increase beyond what the business owner may otherwise calculate. If, on the other hand, the business is floundering due to industry changes or poor market conditions, using an older business value may leave you open to risk as you overextend your credit trying to keep up with poor economic conditions.

Simply basing your business value on similar businesses that have sold recently may not give you an accurate view of your business' value either. If the business you are comparing to has a more favorable location, better position in the industry, specialties that you have not diversified into, different income levels or other aspects that impact the business' overall value, you may be under- or over-valuing your business' actual worth. 

Is your business a household name or a newcomer to the industry? This can make a big difference in how reactive your business will be to changes in market conditions. What about your reputation? A good reputation will often improve your business value as your customers perceive a higher value to the products and services you provide when compared to a competitor.

As you can see, the question of how much is a business worth is a very complicated one that requires significant experience to accurately answer. Fortunately, as a business owner, you don't need that experience. A business valuations specialist who has experience in your industry and special area of operation spends their days looking at businesses like yours to determine those values using standardized methodologies developed for specific situations.

There are many different ways to conduct business appraisals. Whether you're hoping to buy an established company and get into business for yourself or sell your company for a fair price, it's important to know how appraisers think about business valuations for industrial companies. 

Pros and Cons of Market-Based Business Valuations

The market-based valuation of a company makes sense for some industries. Consider the owner of a semiconductor manufacturer located in California who wants to sell the company and retire on the profits. If there are other semiconductor companies nearby, then a business appraiser can compare the company that will be sold with others like it, getting an idea of the market share and competitive advantage of the business. This makes sense for large companies over niche companies with a handful of employees. 

The Gross Revenue Multiple Method may work for small industrial companies. In this method, the appraiser takes the transaction price and divides it by the revenue. The appraiser then finds similar companies and determines a multiple of gross revenue, to which the company's revenue is multiplied by to get a business value. This method is simple and quick. However, it is less nuanced than other appraisal methods, and often best for informational purposes. 

Pros and Cons of Asset-Based Business Valuations

The asset-based method can work to determine a fair asking price for the business. An asset approach estimates how much it would the assets would be worth. Subtracting liabilities from assets, the appraiser will come up with a balance. This method works well for companies that have significant physical assets. However, companies that have intangible assets find that an asset-based method may not accurately reflect their worth. Consider the example of an innovative engineering firm. The imaginative engineers who come up with elegant solutions to problems are not captured as a value-add in an asset based approach. If the engineering company were sold to a new buyer, but the existing staff quit, much of the company's true value would be irretrievably lost. 

Pros and Cons of Income-Based Business Valuations

If the semiconductor company has a stable earnings flow, then EBITDA or earnings before interest, taxes, depreciation, and amortization can portray an accurate business valuation. If the industrial business is experiencing an inconsistent period 0 good or bad - the discounted cash flow method may work well. Here, the business appraiser estimates the future benefits of the company, then converts them to present value to come up with an fair market value. When determining how much is an industrial company worth using discounted cash flow, an appraiser can come up with a stable and fair value for the business even though circumstances are irregular. 

Ultimately, a qualified business appraiser should be able to determine which method makes sense for the given company at a given point in time, correctly calculate a company valuation, and explain the process to key stakeholders. Given what's at stake, it's critical to hire a qualified appraiser who understands the industry.