Business Valuation Blog | Understanding Buying / Selling a Company

How Valuing a Small Business Provides Great Insight

Posted by Business Valuation Specialists LLC on Jan 18, 2021 8:00:00 AM

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It's no secret that small businesses are more flexible than larger companies, able to change production, focus, and market more quickly than their larger counterparts. With this change, though, as a small business owner, how do you ensure you're not exposing your enterprise to excessive risk that could cost you valuable revenue and profits?

Valuing a small business enables you to see into the nuts and bolts of where your company is strong and where it needs improvement, allowing you to manage risk more effectively to take advantage of opportunities as they become available.

Maximizing Flexibility

There's no doubt that the ability to nimbly change direction is one of the greatest advantages of small businesses over larger companies. However, changing direction requires that you know the condition of your business before commencing change. Will an evolution take advantage of market conditions or will a different business environment create growth for your company? Or conversely risk slowing it to a stop, even possibly putting it and everything you've worked for at risk?

To take maximum advantage of changes in your market, you need to know exactly where your business stands to determine where and when to make changes. One of the easiest ways to achieve this goal is by engaging a certified business appraiser to provide an updated valuation of your company.

Knowing Strengths and Weaknesses

How does the valuation of a company help you make it more flexible? All businesses, markets, and owners have different strengths and weaknesses. Knowing where your company lies through a small business valuation provides you with the information on whether an opportunity is a good one that plays to your strengths, or otherwise leaves you open to significant risk with the potential loss of market share. Business valuations are one of the best ways to determine where these strengths and weaknesses lay, whether it's in undervalued equipment, overvalued assets, or poor cash flow issues.

Reducing Risk

Valuing a small business allows you to know whether taking a particular approach to the market is a good idea or not. Business appraisals may help you determine whether your regional location has changed in market share, or what your expected business income may end up being when you've had inconsistent revenues and expenses in the past. You may be able to determine the change in your business is based on a recent boom in the market and if that boom is a short or long-term trend.

If you're considering a merger or partial sell-off to expand or reduce your business, will the new company reflect your strengths or pull it down by exposing weaknesses? By knowing where your company stands within the structure of a business valuation, you can make decisions that will leave you stronger instead of opening you up to needless risks.

By having your business valued by a certified appraiser, you can increase the chances of making good business decisions that will keep your company in the black and growing. Taking the time to have an appraisal performed gives you another tool and the added insight to help ensure you will be successful. If you need assistance finding a qualified business appraiser, please contact us today. At Business Valuation Specialists, our highly-qualified valuation specialists are waiting to help you succeed.

Tags: Business Valuation, business appraisal, valuing a small business, certified appraisal, business valuation appraiser

What appraisal methods are best for valuing a small business?

Posted by Business Valuation Specialists LLC on Jun 28, 2017 11:33:00 AM

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You've worked hard to grow your small business, and now you want to sell it and reap the rewards. To do this, you'll need a business valuation expert who understands the best ways to value a small business like yours. When it comes to valuing a small business, some appraisal methods work better than others. Get our recommendations to understand your best options for obtaining a fair market valuation in anticipation of selling your company. 

Which Appraisal Methods to Use When Valuing a Small Business

These methods provide accurate, timely valuations for small businesses. They are flexible, fair, and easy to understand: 

  • Earnings multiplier method - This income-based valuation method works well for robust small businesses that will be sold on the open market. In this approach, the small business appraiser takes a multiple of the company's earnings potential, which can then be used to determine a business value or asking price. This approach is transparent, tangible, and easy for both buyers and sellers to grasp.
  • Discounted cash flow - This method often makes sense when small businesses experience inconsistent earnings over time. If your small firm oscillates between peak years and lean years, a discounted cash flow appraisal can help even things out, thus capturing a fair value. In this method, all future earnings are translated into present value to determine a small business valuation. 
  • Market-based - A small business in a unique or growing industry can benefit from a market-based evaluation. This is frequently true when an industry has under performed in the past, but is revitalizing or enjoys a promising forecast for the future. In this situation, past earnings may not reflect the accurate future earnings potential of the business. By contextualizing the small business value in market terms and comparing the company to comparable firms that have sold recently, a business appraiser can accurately capture the business's fair market value for buyers and sellers alike. 
     

Which Appraisal Methods to Avoid When Valuing a Small Business

It is generally ill advised for small businesses to use the following business valuation method: 

  • Asset-based valuation - While an asset-based valuation may seem like an effective way to measure a small business's worth, it is rarely recommended. This process can oversimplify things. One exception to this rule is for liquidation purposes. If your business is closing, or if you are filing for bankruptcy, an asset-based valuation may be the right choice.

While there are exceptions to every rule, ask your appraiser to explain why they would recommend moving forward with this approach. In general, an appraiser should be able to sit down with you before the appraisal, explain the process, and answer any questions you have about what to expect from the process. A good appraiser wants to provide you with useful and unbiased information that will help you with your next steps. 

To create the most leverage for yourself, start planning your small business appraisal at least a year before you want to sell the company. This way, you'll be able to make smart decisions in planning for the sale, envisioning your future, and leaving the company you've worked so hard to build in good hands. 

Tags: valuing a small business

How Valuing a Small Business Provides Awesome Insight

Posted by Business Valuation Specialists LLC on Jul 27, 2016 10:00:00 AM

valuing_a_small_business.jpg

It's no great secret that small businesses are more flexible and nimble than larger companies, able to change production, focus and market more quickly than their larger counterparts. But as a small business owner, how do you ensure that you're not exposing your enterprise to excessive risk that could cost you your company? Valuing a small business gives you great opportunities to really see into the nuts and bolts of where your company is strong and where it needs improvement, allowing you to manage risk more effectively to take advantages of opportunities as they become available.

Maximizing Flexibility

There's no doubt that flexibility and the ability to nimbly change direction is one of the greatest advantages of small businesses over large businesses. But changing direction requires that you know the condition of your business before starting the change. Is changing your business to take advantage of market conditions or the business environment going to create growth for your company or slow it to a stop, even possibly putting it and everything you've worked for at risk. To take maximum advantage of changes in your market, you need to know exactly where your business stands to determine the maximum flexibility and profitability you can get out of it. One of the easiest ways to achieve this goal is by valuing a small business.

Knowing Strengths and Weaknesses

But how does the valuation of a company help you make it more flexible? All businesses, markets and owners have different strengths and weaknesses, but knowing where your business lies through a company valuation provides you with the information you need to know whether an opportunity is a good one that plays to your strengths or a bad one that preys on your weaknesses, leaving you open to significant risk and even the potential loss of your company and livelihood. Business valuations are one of the best ways to determine where these strengths and weaknesses lay, whether it's in undervalued equipment, overvalued assets or poor cash flow issues.

Reducing Risk

Valuing a small business allows you to know whether taking a particular approach to the market is a good idea or not. Business appraisals help you determine whether your business location has changed in value, keeping you from taking out a loan against your business property that is higher than the value of the property. It also helps you determine what your actual expected business income may end up being when you've had irregular income in the past, instead of making a change in your business based on a recent boom in your market that could leave you stranded when the market normalizes again. If you're considering a merger to expand your market share, will the new company reflect your company's strengths or pull it down by making weaknesses worse? By knowing exactly where your company stands, you can make business decisions that will leave your business strong instead of opening it up to potential risk and loss.

By having your business appraised by a qualified appraiser, you can ensure that you're making wise business decisions that will leave your company in the black and successful. Taking the time to have a business valuation performed gives you the tools and insight you need to be successful.

Tags: valuing a small business