VALUE A BUSINESS
Edison Business Advisors helps business owners understand the value of a business to support their needs. Whether you want to sell to a third party; sell to a partner, key employee, or family member; gift the business to charity; or liquidate, we will give you a data-driven analysis of your business value.
VALUATION SERVICES
Edison Business Advisors offers the following valuation services:
Edison Business Advisors offers the following valuation services:
- Broker's Price Opinions
- Certified Business Appraisals
- Equipment Appraisals
BROKER'S PRICE OPINIONS
How do you determine the value of a business? A business has the most value to the current owner because they invested the time, energy, sweat, and money to start and/or grow their 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 their debts. Unfortunately, the market does not care what the owner wants or needs. The harsh reality is the business is only worth what someone will pay for it. Therefore, we must first understand who the potential purchasers might be and their impact on value. There are three types of buyers, i.e. financial, strategic, and second-party.
VIDEO: Understanding the Business Valuation Process
FINANCIAL BUYERS
Financial buyers are those looking for a job or a return on their investment (ROI). 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 require the seller to hold a small note to ensure the seller has “skin in the game” to support the new owner for a period of time.
STRATEGIC BUYERS
Strategic buyers are those looking to expand their business through an acquisition. It may be to enter new territory, acquire a skilled workforce in place, advance technology, other intellectual property, or simply 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.
SECOND-PARTY BUYERSSecond-party buyers usually result in the lowest sale price. They may be the current 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. However, they can be an excellent tool for the owner to extract personal value from the company while offering unique and advantageous tax benefits to the business.
APPROACHES AND METHODS
In general, there are three approaches to valuing a business, i.e., Market Approach, Income Approach, and Asset Approach. Combined these approaches have eight methods for valuing a business, e.g., Direct Market Data Method, Multiple of Discretionary Earnings Method, Excess Earnings Method, etc.. When valuing a business, we may combine any number of these eight methods to calculate value depending upon the seller's particular situation (see Valuation Methodology for more information).
In general, there are three approaches to valuing a business, i.e., Market Approach, Income Approach, and Asset Approach. Combined these approaches have eight methods for valuing a business, e.g., Direct Market Data Method, Multiple of Discretionary Earnings Method, Excess Earnings Method, etc.. When valuing a business, we may combine any number of these eight methods to calculate value depending upon the seller's particular situation (see Valuation Methodology for more information).
VALUATION TOOLS
There are many valuation tools to assist in valuing a business, i.e., sold databases and valuation software. Sold databases include DealStats, BizComps, PeerComps, and BBF MLS. Valuation software is offered by BizComps, PeerComps, and a number of other sources. We use these tools to calculate a Most Probable Selling Price (MPSP).
ADJUSTMENTS MADE TO MPSP
APPROACHES AND METHODS
Market Approach
Income Approach
Market Approach
- Direct Market Data Method
- Guideline Public Company
Method - Mergers & Acquisitions
Method
Income Approach
- Capitalization of Benefits
Method - Discounted Future Benefits
Method - Multiple of Discretionary
Earnings (DE) Method
- Net Asset Accumulation
Method - Excess Earnings Method
VALUATION TOOLS
ADJUSTMENTS to MPSP
TESTS
- DealStats
- BizComps
- PeerComps
- BBF MLS
- Proprietary Tools
ADJUSTMENTS to MPSP
- Industry
- Assets
- Inventory
- Buyer Perceived
Defects/Risk Factors
TESTS
- Fair Compensation
- Debt Coverage
- Return on Investment
Adjustments need to be made to the MPSP based on a number of risk factors that can affect the value of the business. Some of the more important risk 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, age and quality of assets, inventory adjustments, and lack of diversification in product selection or geographic areas served. Other important value factors include the state of the industry, the stage of the business life cycle, and susceptibility to changes in laws and regulations that affect the business. There are up to fifty-four risk factors to analyze to determine the adjustments.
TESTS
Finally, we test the adjusted MPSP with two tests. The first test is to ensure the deal will qualify for a loan as per the Small Business Association loan guidelines. The second test is to ensure the buyer is able to pay themselves a fair compensation for their time, adequately cover their debt, and provide a strong ROI based on the risk incurred when acquiring a specific business.
Most certified and/or trained business brokers are capable of providing a ballpark estimate of business market value.
CERTIFIED BUSINESS APPRAISALS
For valuations requiring a greater level of detail or being 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). To learn more about how a certified business appraisal is conducted, go to our Valuation Methodology page.
If you have questions about the different approaches, methods, and tools of valuation and which ones may be appropriate for you or have questions about a certified business appraisal, please contact us for a complimentary, confidential consultation.
