As a small business owner, it is important to stay current on the value of your business. Having an independent professional appraisal completed annually is the best way to handle this. Here is a brief summary of the process that will take place:
Business valuation is a specialized field that offers accreditation through recognized organizations. Look to engage a certified appraiser with sufficient experience to ensure an unbiased and thorough assessment. Two of the better-known associations are the American Society of Appraisers (ASA) and the National Association of Certified Valuators and Analysts (NACVA).
Once you describe your business and current situation to the appraiser, they will quote a scope-of-work fee and, if accepted, follow up with a formal engagement agreement.
It is important that you have accurate financial records available for the appraiser and that the most recent statements have been prepared. If they are lacking, have your accountant review and update your records.
The appraiser will consider and rely upon different approaches to determine a business's worth:
- Income Approach: Examines the business's earning potential and cash flow. If your company is continually meeting goals and growth expectations, this methodology will be important to measure.
- Market Approach: Compares the business to similar ones recently sold and factors in gross revenue and net income. Specific market multiples will also play a part in developing value.
- Asset-Based Approach: Focuses on the company's net assets minus liabilities. This approach may apply to companies with large capital equipment and real estate investments.
The choice of methods will depend on several factors, including the industry and the company's current operational state.
The appraiser will communicate with the business owner, gather financial data, and provide a questionnaire covering the company's history and structure. Ensure you provide full disclosure regarding revenue trends and profitability, how the market and industry affect your operations, whether there are ownership (buy/sell) agreements in place, and what discretionary adjustments should be made to the income statement and balance sheet.
In summary, providing clear, well-supported documentation to the appraiser will result in the most accurate and credible outcome. Once you have a formal, current appraisal report in hand, you are prepared for ongoing or anticipated events in your small business where value plays a role in the transaction.