Business Valuation Blog | Understanding Buying / Selling a Company

Getting your small business valued is essential, especially if you want to make informed financial and strategic decisions. Here are some key reasons why a business valuation is crucial:

1. Understanding the True Value of Your Business/Internal Planning

   An appraisal helps you understand what your business is actually worth. Many owners have a general idea, but a formal valuation gives you a clear, objective figure based on market trends, financials, and future potential.

   A valuation can also be a benchmark for tracking your business's financial health and growth over time. It can highlight areas that need improvement and allow you to set measurable goals.

2. Selling or Merging a Business

   Knowing your business's value is essential to negotiating a fair deal if you're planning to sell or merge it. It also ensures you're not underselling or overestimating your company when approaching potential buyers or partners.

3. Attracting Investors or Raising Capital

   Investors will want to know your business's current value before committing funds. A certified appraisal helps attract investors and secure better terms in funding rounds or when applying for loans.

4. Exit or Succession Planning/Tax & Estate Issues

   If you plan to retire or want to determine a sound exit strategy, a business valuation helps in planning for the transition. It also assists in setting fair expectations for all parties involved.

   Independent objective appraisals are necessary for estate planning, especially when passing on your business to family members. They ensure compliance with tax laws and help minimize tax liability during inheritance or ownership transfers.

5. Litigation and Legal Matters

   In cases of divorce, shareholder disputes, or business litigation, a formal valuation is often required to resolve the financial aspects. It provides a clear figure for settlements, buyouts, or compensation.

For these reasons and others, it makes good business sense to have your company appraised by an independent valuation professional to ensure you have a true and objective picture of its value in order to make fully informed choices.

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.

It doesn't matter whether it's time to sell, pass the hat to the next generation or just get a better picture of where your business is heading, determining the valuation of a company can be a very complex, confusing process for many business owners. How do you determine the value of a business? The world of business valuations involves several different approaches to help answer that question. Here are the basics to help get you going.

How do You Determine the Value of a Business?

There are several key approaches that are used and methodologies within each one, depending on what your situation is:

• Asset-Based: Though this is often the one most business owners turn to, it's also the least accurate of a healthy business. An asset-based approach uses the value of the business' assets alone. The problem with this type of approach is that it doesn't account for the business' goodwill or its future earnings. For that reason, it's typically only used in liquidation situations, such as bankruptcy. It can include a number of different approaches, but if you ever deal with an appraisal company that is basing the valuation of assets in the company books, you'll want to proceed with caution when selling, especially if you have fully-depreciated equipment or assets that are still in operation in the business. Using a book value approach means that those pieces of equipment are essentially being given away in the process rather than holding their actual value to the business.
• Income-Based: When you sell your business, you're not only selling the assets, you're selling future income. For that reason, income-based business valuation is one of the most popular types of business valuation used in small and medium privately-held businesses that have enjoyed steady market conditions for a period of time. Generally speaking, when a company has had a steady cash flow over the years, it will be appraised using capitalization of earnings approach to reflect that regularity. In contrast, a company that has had irregular income will often be valued using a discounted earnings approach.
• Market-Based: You may want to consider a market-based approach to business valuation. Why? Because when an industry is in a period of rapid growth, past income may not reflect future potential accurately enough. During these times, a market-based approach looks at businesses that have sold recently that have particular similarities to the business being valued. This method can use multiples of discretionary earnings or gross revenue, the sale price of a similar transactions. In the last two methods, the sale price is adjusted for any differences between the companies to come up with the best fair market value for the company being appraised.

So how do you determine the value of a business? By this point, you know that business appraisals are just as flexible as the circumstances that demand them. If you need help determining the valuation of a company, we can help.

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.