Business Valuation Blog | Understanding Buying / Selling a Company

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.

Buying a business is a big investment. Though it may be the culmination of a lifelong dream, there's always a chance that dream could turn into a nightmare. From poor profitability to hidden problems with assets, knowing what you're getting into before you buy is always a good deal. Here's a quick look at how a company appraisal can be a big help during the process.

Why is a company appraisal helpful when buying a business?

As you look at a company you're thinking about buying, what kind of information do you need? Finances, reputation, market share: all these areas tie together into a picture of the company's overall value. But how is that value determined? Most of the time, the business is worth significantly more than just the sum of its assets once liabilities are handled.

A company appraisal provides you with a great deal of information to help you decide whether it's a good investment or not. The appraiser starts by taking a solid look at the company's financial records. They can determine what the expected future income of the company will probably be, based on its financial history. 

But what if your company is in an industry that has really taken off recently and the owner wants to take advantage of that potential in the sale price? A business valuation takes a deep look at where the market currently stands and where it's projected to go in the future. That helps you to decide whether the investment is a good risk or not.

What about the company's reputation in the market or community? If the brand is well known for high quality products or services, you can benefit from that reputation and community goodwill when you buy the company. This may allow you to see better returns with less overall work in a shorter period of time.

Is the company known for its unique approach to innovation and development of state of the art products? This is another area where a business appraisal specialist can look at what the company has done in the past, what their market share is and what you may be able to expect from that advantage well into the future.

Are there areas for improvement? Many businesses operate at less than peak efficiency for the majority of the time. If there is room for improvement, you can quickly turn a mediocre level of profitability into a truly outstanding one. The appraisal report will include some information on where improvements could be made.

How well does it hold up when compared to its competitors? Part of the business appraisal process involves looking at the industry or regional market, depending on the type of business you're getting into. When it comes to business value, there are a wide range of factors that can make the business you're considering buying better or worse than others, depending on location, well-known employees or other factors.

When you take the time to investigate the company you're purchasing carefully, you'll quickly find that the benefits well outweigh the costs. A company appraisal performed by a certified valuation specialist helps ensure you're making a wise investment instead of throwing good money after bad. By finding an appraiser with experience in your industry, you're sure to make a great start when buying a business.

When it comes to the world of commercial real estate, we often approach the valuation of a company at the request of a seller who is not sure what the property is worth or who needs a negotiating tool to bring up a low offer. But just as important to consider in the purchase of a company is valuing a business for sale when you're the buyer. How do you know the seller is asking a fair value? Is there something going on with the company if their asking price seems too good to be true or too ridiculous to consider? In this piece, we'll take a solid look at why it's vital to have a business valuation performed on a company you're considering purchasing.

Why Valuing a Business for Sale Helps Ensure a Smart Investment 

Finds Potential Problems

The first thing that can arise in business valuations is potential problems with the company that could lead to serious problems and investment risk down the road. If the current owner is reporting income but not mentioning that it's been a banner year or that income can be irregular in that industry, it's easy to assume that the income level will remain steady at the current levels well into the future. Unfortunately, when the industry goes back into a bust cycle or otherwise goes through serious changes, your investment may end up being a bad risk. A proper business valuation provides you with a stronger set of background information so that you can make a solid informed decision about whether this business is the one you want to buy or if you'd do better to wait for another opportunity to come along.

Discovers Incorrect Valuation Assumptions

Buyers and sellers often have vastly different ideas of where a business' value actually falls. The buyer sees the potential risks and drawbacks, while the seller sees years of dedication, hard work and toil that has built a successful business. Because the valuation of a company must take a neutral viewpoint, the business appraiser can find the true value of the company by both considering all the potential risks that may be in the operation as well as the goodwill that the seller has built up over the years in the community or industry.

Provides a Solid Negotiation Point

One of the most nerve-wracking decision points for many interested in purchasing a business is the sentence, "make me an offer." Suddenly, you're stuck in a careful dance, trying to determine a fair price for the business that neither offends the current owner as being too low nor leaves you paying far too much for a business of questionable value. Just remember, there's no shame in admitting that you're not sure what that would be and that you'll get back to the owner with a potential figure. Business appraisals provide a safe middle ground when it comes to negotiating a price for a business, because you know your offer or counteroffer is based on the actual value of the company.

By valuing a business for sale prior to entering negotiations, you're ensuring that you know all the aspects that could cause problems for you down the road.

When you're looking at buying a business, there are a million things to consider during the process. What are you going to keep the same? What changes are you going to make to improve the business? What upgrades are needed? But before you sign on that dotted line, you need to have a solid business appraisal done to help you determine the valuation of a company. Why? We're glad you asked.

Why a Company Valuation Is Important When Buying a Business

• What is the business really worth? Though the seller may be asking the same as a similar business in a neighboring town, the business they're selling may have a poor location, a less than stellar reputation or other reason why they're asking too much for it. By having a business appraisal performed on a business you're considering buying, you have a solid point from which to negotiate a better price.
• Are there any potential problems that you're unaware of with the business? Is the industry expected to improve or decline? A qualified business valuation specialist will help find these potential problems so you don't end up with a nasty surprise.
• Is the seller asking too high a price because of emotional attachment? Sellers who haven't had a good business valuation completed tend to fall in one of two areas - a fair price (or good deal from a buyer's perspective) or an inflated price. You won't know which is which until you have a good company appraisal performed to determine the accuracy of the figures.
• What's the business' projected income for a new owner? Financials are often hard to understand because owners sometimes pay themselves more or less than a fair wage.  A business valuation will help a new owner get an answer to this question by calculating the Seller's Discretionary Earnings.

By having quality business appraisals performed before buying a business, you can rest assured that you're getting what you've paid for and that you're making a great investment in your future. If you haven't had a chance to get a quality business valuation from a certified appraiser, please contact us today. Our experienced business valuations specialists work with small businesses, making them a great choice to discover exactly what is happening with the business you're buying.