VALUATION AND METHODOLOGY



BUSINESS VALUATION


How do you determine the value of your business? The first question is, value to whom? Since everyone knows anything is only worth what someone will pay for it, we first have to decide who the purchaser might be. The business is usually worth the most to the current owner because they are the one that invested the time, energy, sweat and money to start and/or grow the business. It usually includes a lot of sacrifice of family and leisure time. The value to the owner is often based on what the owner “needs” to retire or satisfy debts. Unfortunately, the market doesn’t care what the owner wants or needs.


The value to the market is typically based on the sale of similar businesses. No two businesses are completely alike so adjustments need to be made from the average sale price based on a number of factors that can affect the riskiness of the business. Some of the more important factors include the reliance on the owner and/or a few key employees, a concentration of sales in one or a small number of customers, and lack of diversification in product selection or geographic area served. Other important factors include the state of the industry, the stage of the business life cycle (growth or decline) and susceptibility to changes in laws and regulations that affect the business. We analyze fifty-four value factors to aid in determining the adjustments.


Financial buyers are those that are looking for a job or a return on their investment. They rely heavily on “multiples” based on prior similar transactions. They are usually looking for businesses for less than one million dollars and usually require financing from a bank, and often with a Small Business Administration (SBA) backed loan. Many banks also require the Seller to hold a small note to ensure the Seller’s “skin in the game” to support the new owner for a period of time.


Strategic buyers are those that are looking to expand their business through acquisition. It may be to enter a new territory, acquire a workforce in place, advanced technology or other intellectual property, or simply to eliminate the competition. Since the Buyer is often able to operate the acquired business more efficiently, they are capable of paying a premium over fair market value.


The lowest sale price usually results from a sale to an insider. This may be the management team or a family member. Financing usually includes a much larger Seller note and may include an extended payback period. A sale to employees is also available through an Employee Stock Ownership Plan (ESOP). The ESOP is typically reserved for larger privately-owned businesses due to the setup and administration fees. They can, however, be an excellent tool for the owner to extract the personal value from the company while offering unique and advantageous tax benefits to the company.


Most certified and/or trained business brokers are capable of providing a ballpark estimate of business market value. For valuations that require a greater level of detail, or those that will be used for litigation support, engaging a Certified Business Appraiser is highly recommended. Certified Appraisals are required to follow the Uniform Standards of Professional Appraisal Practice Standards (USPSP).


For more information about the different levels of valuation and which may be appropriate for you, please contact us at your convenience for a free consultation.