Business Valuation Blog | Understanding Buying / Selling a Company

If you have owned a business for a number of years and now need an appraisal to sell the company, apply for financial assistance, or bring in new investors, you will need to have reliable financial documentation that provides historical performance details.

The most common records you will need are income statements, balance sheets, and tax filing records. You can provide further information by responding to a series of typical questions the valuation professional will ask during the process, that will give additional perspective on how to view these documents and make discretionary adjustments to the income and expenses of the business.

The appraiser will ask for 3-5 years of these filings, and they should be developed by an outside accounting agency or internal company controller. If you find yourself in a position where these records are not current, or poorly documented, you will need to determine the best way to update them, otherwise, the appraiser may not be able to assist you.

One option is to hire a forensic accountant or bookkeeper who can go through all the business receipts and related paperwork in an effort to develop formal documents which can be utilized for the appraisal as well as support these transactions. A potential buyer, financial institution, or investor is not going to blindly give you funding if the historical performance of the company is not well-detailed and documented.

Keep in mind the appraisal firm you engage with cannot actively participate in the development of these documents since they need to remain independent and unbiased when estimating their value opinions. As a business owner, you will know far more than anyone about the previous performance of the company as well as have access to the records needed to put these documents together. Whether you decide to take this project on yourself or work with an outside agency or internal employee, your direct involvement in the process will be critical.

Regardless of your immediate desire to put the business on the market, or look for new capital funding alternatives, take the time now to review your business records and determine if they are accurate and up to date. Even if they are, take further steps to organize a file to consolidate and provide easy access to, all the historical financial records of the company so that when the time comes, you will be prepared to move forward.

If you are unsure of the steps needed to complete this effort, contact a certified accountant or appraiser who can discuss the process further and give you informal advice that gets you on the right track.

As a business owner, no one knows more about your company, its operational history, and where it’s headed going forward. When you determine the need for an independent appraisal, the ability to work in tandem with the company you choose to engage with will benefit all parties involved.

There are very likely areas within your financial statements you can elaborate on to paint a more accurate picture than simply what the numbers show. In addition, your experience with the markets and industry you operate in will provide added perspective to the appraiser when they research the competition and comparable businesses during the course of the analysis.

Review overhead and expenses to determine if any are discretionary and adjustable to how you might otherwise operate on a leaner budget. Look at what might be considered “one-off” costs in certain years that can be backed out of annual cash flow levels and review special compensation packages to you and your employees which might not be relevant to a potential buyer. You may be claiming a lower net income figure on your taxes each year because of these discretionary expenses. That is a common strategy for business owners each year as they best position themselves before year-end filing.

The goal is to create a normalized, realistic year-to-year snapshot that shows how the business can most efficiently and effectively run without consideration for added unnecessary benefits you may have created over the years for you and your staff.

When a small business changes hands, the new owner will have their own set of circumstances to consider and will often look at the most economical model to begin their operation until they too can create these added benefits once they become successful in the coming years.

From a market and industry perspective, advise the appraiser of local competition and similar businesses that may be public or available enough to make reasonable comparisons. Discuss future areas of growth you may have implemented but have yet to fully realize the added revenue streams.

It’s important to add these levels of perspective where you can so the appraiser better understands your business beyond the standard documentation that they are provided with by you or your financial advisors. The more the appraiser knows about your personal experiences as they relate to the history of your company and its operation, the more accurate the valuation results will be.

As a business owner, there will come a time when you begin to consider selling the company, hopefully after years of growth and prosperity. Whether you are eyeing retirement or thinking of shifting your career path, you will need to determine the ideal exit strategy for the company and explore the options available to you. Here are a few to think about:

Internal Sale to Key Employees

You have likely built lasting relationships with some of your top personnel who have been loyal over the years and helped you build the business up. An internal company sale to employees who are ready to take on the additional responsibilities of ownership will avoid the extended time and risks of an open market transaction. This will also instill confidence in all your workers that you intend to keep things as consistent as possible during this transition and in the years to come.

The downside is that you may need to develop an affordable seller financing package that allows the employees to pay you over an extended period of time.

Engage with a Business Broker

You should be able to research the market and find a couple of business brokers who specialize in selling companies to other third parties in your industry. This process will probably involve considerable time and expense, however, the end result may be worth it. Make sure you conduct a thorough background check and interview process before committing to a company as you will be heavily reliant on their ability to successfully complete a sale which may take several months or even a year or more to finalize.

Develop your own Marketing Plan and Sale Strategy

If you have a lot of industry contacts and feel confident that you can manage the process independently, consider taking the time to develop a strategy to market your business solo. If you strongly believe you have the knowledge and experience, as well as the time, and understand the risks involved in this kind of venture, you might be best served to sell the company yourself, relying on the fact that no one knows your business better than you.

You should have your accountant, attorney, and any other key advisors involved in the process to mitigate risk and avoid miscommunicating information to potential buyers. This option has the most upside potential but higher downside concerns given the independent nature of the transaction.

In summary, this decision will be one of the most important ones in your life so take plenty of time to consider your options and seek advice as needed.

A few times each year, I like to discuss future planning strategies and long-term growth with business owners, and how they look ahead while keeping one eye on past successes and failures. Oftentimes, forward-thinking involves the potential for expanding the company, however, what if your firm is at the point where everything is running smoothly with revenues and net income right where they should be?

There may come a point when forecasting over the next few years involves simply keeping the structure of the company the same while making minor tweaks to refine existing strategies that will potentially improve margins. Is this an example of resting on your laurels or has all the hard work in the past finally reached a point where major changes are not economically feasible? Perhaps you are even risk-averse to future growth since diminishing returns would be a likely outcome.

This type of strategy may be more common than you think. Being a successful business owner does not always equate to having the compulsion to constantly reinvent the wheel. In fact, many experienced entrepreneurs in niche markets understand that once you have reached a certain level of market share, you have essentially positioned the company at the ideal point where current revenues, overhead, and profits are at optimal levels.

Depending on your overall personality, current drive, and where you are in your career path, it may be the perfect time to enjoy the fact that the business is exactly where you planned it to be years ago and consider whether you want to take a breath while reaping the rewards or move onto another opportunity. You have options in front of you, even though they may not be the same ones that got you where you are today.

Looking inward and reviewing how best to maximize the benefits of your existing employees and client relationships while fine-tuning a business that now needs only minimal maintenance are things you can do regularly. After all the challenges you’ve faced and past successes you accomplished, that is a great way to keep your company optimized.

As a business valuation professional, oftentimes your work effort goes beyond the preparation of an appraisal report. Business owners may engage with a more comprehensive advisory team to accomplish their goals, including tax, accounting, and legal representatives. With the potential threat of audits and legal disputes involved with certain ongoing project requirements, this team of experts may all have a role in the successful outcome for your client.

As the valuation professional, ensure that you include a clear delineation of the scope of work and fees associated with preparing and delivering the appraisal report and any follow-up consulting work which may arise as the transactions or cases develop. One option to accomplish this is to have a fixed cost for your initial report and hourly rates specified for any work pertaining to the continuing efforts related to the larger advisory team.

If you know the valuation work will be included as part of an ongoing or potential audit, or if litigation consulting and testimony may be involved, discuss these issues with the client and other members of the advisory team, so you can gauge the depth of additional time involved and look to better plan the future scope of work.

Ensure you document all your discussions, both by phone and email, while tracking your time on a weekly or monthly basis so you can support the additional costs involved with the prolongation of the appraisal engagement.

Look to these kinds of projects as an excellent tool to gain additional experience while working within a team environment where a common goal is to bring value added to your client’s transaction or legal case. Better understand the larger perspective of the matter so you can best prepare and potentially bring thoughtful suggestions to the table which relate to your role in the scope of work effort.

The most successful service providers understand how to look outside of their day-to-day analysis and report responsibilities and develop expanded opportunities in a business consulting and support environment. In a professional world where disputes are common and must eventually be ironed out, you can leverage your expertise to involve yourself in these cases and become a more diversified appraisal firm.

We all know about new year’s resolutions from a personal perspective, along with the challenges these can bring in accomplishing them both in the short and long term. One of the hardest things for many of us, in both our day-to-day lives, and as business professionals, is examining the things we don’t do very well, and changing our habits permanently, to create a more successful outcome.

As a small business owner, you may feel even more invested in making these course corrections for your company each year as you assess past achievements and look to improve areas where results were less than optimal. This behavior is part of the core foundation of a long-term growth strategy that keeps your business operating as efficiently and effectively as possible. As the larger industry and marketplace, you work in changes over time, you need to keep up and adjust for these external issues. Also, review your internal structure and processes and determine whether there is room for improvement in any areas that drive revenue and control overhead and variable expenses.

Consider who on your team has outperformed expectations and how they might help take your business to the next level by promoting them or expanding their responsibilities. Keep an eye on employees who may be going in the opposite direction and determine if you can bring them back into the right mindset or potentially need to find alternatives for their role in the company.

Even if you had a very successful year in 2022, it is prudent to refresh your outlook on how the operation functions, while continuing to improve and create further growth opportunities. The concept of “if it ain’t broke, don’t fix it” doesn’t apply in situations where change occurs, both within and outside of your control, in the business marketplace, and right at your doorstep.

Seek to obtain advice from key advisors and employees who you trust and work with on a year-to-year basis. Objective opinions outside of your own experience are always useful to potentially view things from different perspectives before you fully commit to a course of action.

Give yourself the opportunity to look back at 2023, a year from now, and tell yourself you did everything you could to continue to create the best version of your company. Every objective may or may not be accomplished, however, putting in the effort to carefully consider all the options to remain successful, and continue to grow, will be rewarding.

For those tireless small business owners whose hard work and good fortune have enabled them to build a profitable, growing company, it might be time to consider how best to “share the wealth” and develop beneficial plans for your employees while accessing profits to accelerate your retirement planning. Here are a couple of thoughts to get you moving in the right direction:

401K Plan

Many of us have previously worked in a larger organization where 401K plans were available as part of a benefits package. Setting aside a percentage of your paycheck on a pre-tax basis that diverts to an investment retirement account is a sound future plan for many employees. Certain corporations will match the employee contribution up to a certain amount, typically 3-6%, providing additional advantages to the plan.

Why not set this up in your small business? This will benefit both the business owner and current employees while improving the attractiveness of your company to potential new hires.

Employee Profit-Sharing Plan

A profit-sharing plan can create a significant benefit for both the business owner and their current staff and provide additional assistance in retirement planning. These plans act like deferred annual bonuses for the employees while enabling the business owner to deduct profits on a pre-tax basis as a bottom-line expense to the business.

Similar to the 401K plan, these funds act as a longer-term investment. For employees, there is usually a vesting period that accrues every year, creating an incentive to stay with their employer until the account is fully vested. 20% annual vesting is common, creating a five-year timeline before the funds are 100% accrued.

Combined Plans

Creating a multi-level investment plan for you and your employees can create even more advantages for those who participate. For example, combining a 401K with a profit-sharing plan may allow the business owner to realize a maximum level of pre-tax income benefits allowable under the tax laws. Once you have committed to developing these kinds of ideas internally, you should contact your financial advisors who will take you through the detailed steps involved in creating and enacting these plans, while explaining how best to structure them for your specific business. This can be a complicated process so make sure you fully understand all the pros and cons involved before formalizing.

Many small business owners often wonder what their company is actually worth when they review each year’s performance results, growth patterns, and future outlook. Why not take this process a step further and definitively determine the overall value of your business?

You may answer this by claiming there is no benefit to having a formal appraisal completed until you absolutely have to. If there is no requirement such as for bank/SBA financing, new investor buy-in, partner dissolution, sale of the business, or other ownership shifting events, then is it really necessary? Won’t it require a lot of extra time and effort I don’t have? Isn’t it expensive?

The answers might surprise you. Working annually with a certified business appraiser can become a seamless part of your regular tax accounting processes and provide additional backup to your financial statements in the event any internal or external third parties ever want to review them with you. Minority partners, shareholders, key employees, new investors, banks, tax authorities, and others may knock on your door one day and ask about the state of the business.

Having an annual appraisal to complement the rest of your data will go a long way to efficiently address these issues. If an insurance, compliance, or tax audit is required down the road, you will be several steps ahead toward resolving these as painlessly as possible.

From an expense perspective, the cost will vary depending on the size and complexity of your business, however, you should be able to find a reputable valuation firm that understands your business and has the experience to provide a reasonable fee level in line with your expectations. Committing to an annual review and update with your valuation professional may enable you to receive some type of discount on future appraisal work.

Ensure you engage with a certified, experienced appraiser who will provide a high level of service and integrity with their work product. There are a handful of inexperienced and disreputable companies in the marketplace offering cut-rate prices, so be sure to research your options before you make a decision based solely on cost.

In summary, the overall value of having an annual business appraisal completed in tandem with your normal accounting and tax filings far outweighs the incremental costs involved. Planning ahead is always a good practice to instill in your business, so you will always be prepared for whatever may happen in the future.

As a small business owner, I receive dozens of email “come-ons” every month advising me of wonderful new marketing, accounting, hiring practice methodologies, or related services that are supposed to increase my company’s effectiveness and efficiencies, leading to a healthier bottom line.

Personally, I have never followed up with any of these places, however, that doesn’t mean some may provide a useful service for my company. I just happen to be an old-school manager who has people I trust handling these kinds of things for me internally.

As a business owner, you should do what works best for you and your business. Have you been mired in the same processes for years without thinking of new ways to improve your business model? Are you a new start-up, ready to utilize the latest technologies, products, and services available to enter the market running at top speed?

In either case and for most business owners who are somewhere in between these two scenarios, you should keep an open mind about process improvements while continuing to rely on your own experience and expertise, as well as those of your coworkers. If you don’t have certain areas well covered at the moment, such as social media marketing, website development, or accounting software, it may be a good idea to research and engage reliable third-party companies who provide these services or look to hire those with the skill sets required to handle these key sectors of your business.

Consider if your goal is a long-term permanent improvement to your company’s capabilities or a shorter-term fix that can be solved with the help of an outside consultant. Depending on the industry you operate in, products such as accounting, valuation, and inventory management software, might be useful to consider acquiring. Other areas that are critical include marketing, website design, and search engine optimization.

Capitalizing on your past success and old-school work ethic, while staying current with the latest developments and capabilities in the business marketplace, will provide the best opportunity to be successful as you move forward with your small business. Take the time to review the strengths and weaknesses of the key components of your company’s current profile, and look to create a plan that will put you in the best position to succeed today and in the future.

Small business owners who have spent the time going through the initial stages of becoming established and developing a steady revenue stream under their existing plan may decide it’s time to consider what it will take to expand and grow the company to the next level.

Depending on the type of business you operate, your competition, and available resources, your growth options will vary. Here are a few to consider that might assist in your expansion efforts.

Marketing Effectiveness

Marketing is the biggest day-to-day challenge for many small business owners. In today’s digital world, a lot of focus has been on upgrading the effectiveness of your SEO (Search Engine Optimization), website appeal, and social media activity.

For others, old-school word of mouth and physical networking such as industry conference presence is something to consider investing more resources into.

Expanded Client Services

For those companies who rely on a handful of clients to drive their business, look to provide additional services such as consulting or new product development. What complementary services are you capable of providing that will open up new revenue sources?

Sales Force

Consider bringing in new talent with experience and new client relationships that can immediately impact growth. It may be more costly in the short term but can soon reap the rewards of permanently expanded market share.

Existing Staff Effectiveness

For those employees who have been with you since day one, consider how they might take on updated, expanded roles that can lead to efficiencies in all areas of your business. You may be pleasantly surprised how much your existing staff is capable of doing, especially when you add plans for incentivizing the extra work effort.

Growing your business to the next level can be a new and exciting objective that can reinvigorate you and your team’s investment in the company. Take a hard look at how you achieved all that you’ve done up to now, and what areas of the company can improve and expand, to provide the best chance of getting you there.