Business Appraisal Services – How Much Your Business Worth?

1.jpgMany of us believe we know the general value of our business, after all we know the products/services, the quality, and how successful it’s been. Often though we’ll oversell our own ideas to ourselves, and this number will turn out to be quite far from the mark. You may need to get a business valuation. For instance, maybe you’re trying to sell the company and need to know it’s market worth in order to sell. It might be for your taxes, or you may even be litigating. These are all cases where you need to have an accurate valuation.

There are five steps involved in getting a proper valuation:

  • Preparing and Planning
  • Adjusting the Finances
  • The Different Valuation Methods
  • How to Apply the Methods
  • Concluding the Value

Step 1: The Importance of Prepping and Planning

Organization is key, so you should understand why you want this valuation, and the gather all the relevant data. These valuations will not be a guarantee. They represent the general worth of the company, not the exact.

Things to keep in mind before you proceed:

  1. How does the business operate? Does it incorporate a tax-efficient structure, and can it be improved? Have sales been on the rise or have they been on a steady decline? What size is the demographic of your company?
  2. Valuations aren’t just taking your liabilities our of your assets, because some of your assets aren’t tangible.
  3. Carefully choose your appraisal team. If you work alone then you’re going to get tired quickly, and you’ll be quite likely to make a mistake. You’ll want a good accountant, and then possibly an attorney and broker.

Often a company owner will sell to make a big profit. In this situation, they’re treating the sale more like an auction, waiting for the highest bidder to come along and seal the deal. Your main focus is to find the fair market value, or the amount that a buyer could reasonably be expected to offer.

In some cases a rival may approach in an attempt to buy, even if the owner hasn’t said they’re selling. Sometimes these companies need want to use the resources in the first business for their own. This is called a synergistic buyer. They do this by applying an investment standard. In this scenario, they’re assuming the value of the business themselves based on public information.

One of the more sad, and common, situations is that the company must liquidate its assets because they’re going through bankruptcy, or there’s been a natural disaster, or some other event. In these cases, owners don’t have time to sell the company at their leisure, and therefore need to sell as quickly as possible.

By understanding why you need this information you can figure out what numbers you need and what level of depth you’ll need to go to. You may need staff records, business plans, vendor information, financial statements, and operational procedures. Some of these will provide immediate parameters to measuring the full value of the company, but in order to get to the specifics, you’ll have to crunch some numbers.

Step 2: Recasting Finances

The process will need the company financial information. The two big financial statements you’re gonna need are the income statements, and the balance sheets, the first being all the profitable operations in the past and present, and the second being statements that give the relationship between liabilities, assets, and owner’s equity. An accurate valuation requires at least three years worth of these statements.

Knowing that the owners have a copious amount of discretion available to them when it comes to making decisions and recognize what is an asset, income, and expense, the statements may require readjusting or recasting. It’s important that you construct a relationship between these things and figure out what they’re able to produce together. In order to use these in valuation you’ll have to recast them.

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Step 3: Choosing Valuation Methods

Once the data has been assembled you can finally choose which procedure you’d like to follow. There are a number of accepted methods, but the best thing you can do is to utilize as many as you can, so that you can cross-check and reference all of your results. If all the results you get are close to each other then you can expect that you’ve done an accurate valuation.

Some of the popular methods include:

The Asset Valuation Method

This method is used to determine the value of the assets that are currently owned by the business. Especially true for smaller businesses, this method, while helpful, doesn’t normally produce a full and accurate number. No matter how many assets you have, if they aren’t producing income then the company is simply sitting on resources. However, you may only have a few assets, but those could be create a lot of profit. This method is better for a larger company, since it doesn’t always paint a good picture of what’s really going on with the businesses operations.

Some off-balance sheet assets that are included in the Asset Accumulation valuation are:

  • Services and products within your intellectual property.
  • Key contracts for customers and distribution.
  • Your different partnership agreements.

You’ll likely want to add these liabilities in as well:

  • Upcoming legal judgements.
  • The company’s obligations with regards to income and property tax.
  • {Environmental compliance costs.|The cost of complying with environmental standards.|Your costs for environmental standard compliance.

The Liquidation Value Method

Without considering the reputation of the business or owners, this method strives to tell you what the company would be worth if it was sold on an open market. It takes into account the physical assets, things like equipment, inventory, and real estate.

Comparable Company Analysis


This is normally the easiest method to perform. In order for you to have a comparable company value, it must be one with publicly traded securities.

This method is best suited to a company that is considering, or has recently done, a small acquisition of equity. This does not help when the added value comes from a change in the main person in charge. When a change isn’t occurring this method is the most used technique.

Discounted Cash Flow Analysis

A discounted cash flow analysis (DCF) valuation attempts to get at the value of a company in the most direct manner possible: a company’s worth is equal to the current value of the cash it will generate in the future, and DCF is a framework for attempting to calculate exactly that. In this respect, DCF is the most theoretically correct of all of the valuation methods.

There are certain obstacles that come with this. DFCs are able to give you an estimation based on your computation and theories, however they risk failing to ascertain the exact company value. DCFs are exceedingly difficult to get right in practice because they involve predicting future cash flows (and the value of them, as determined by the discount rate). By attempting to make predictions your numbers are going to be based off of assumptions and speculations, and they’ll become less accurate the further in the future you go. Any number of assumptions made in a DCF valuation can swing the value of the company√≥sometimes quite significantly. This method is best left for companies with a very stable and predictable income, like a long standing utility company.

Precedent Transaction Analysis

This is a fairly easy method to use. It requires the specifics of a prior acquisitions deal, such as share price, number of acquired shares, and amount of debt assumed. You should assume this is the company that was acquired had previous publically traded instruments.

A Precedent Transaction is used to ascertain the difference in value of comparable companies that were acquired before and after the transaction (market value before vs. amount paid for the company in a purchase where control is changed). This difference represents the premium paid to acquire the controlling interest in the business. This method is best suited for valuation in situations of acquisitioning other companies.

Leveraged Buyout Analysis

Leveraged buyouts (LBO) are the acquisition of a private or public company that has a large amount of borrowed funds. Often LBOs are used for flipping companies, that is the idea of buying one cheap and selling it at a profit in a few years. These are usually conducted by private equity firms that are attempting to maximize returns from these investments by using as much borrowed capital as possible (otherwise known as debt financing) to fund the acquisition of a company. There are three ways to do an LBO analysis:

  1. Assume a minimum return for a sponsor as well as a reasonable equity/debt ratio, and use this to impute a company value.
  1. Impute the necessary ratio of debt to equity based on an appropriate company value and the minimum expected return for the financial sponsor.
  1. Assume an appropriate debt/equity ratio and company value, and from this compute the investment’s expected return.

Step 4: Take time to Apply the Method

Now that you’ve got your data you can finally find the value of your company. None of these methods will yield a completely accurate result, so you should use a few of them. Along with that, cross-checking between these different methods can verify the accuracy of how much the company is actually worth by minimizing the chances of repeating numerical and budget errors. The more homework you do and the less mistakes made, the more accurate the valuation.

Step 5: Concluding the Value

You can now use the results from the valuation method to asses your business’ value. This is called the business value synthesis. Knowing that no one method is going to be completely accurate it might behoove you to use multiple methods and then look at all the results to come to a conclusion. The value is going to be subjective, no matter what you do. While you may think your company is worth a certain amount, others might be more than willing to point out every last little flaw and money sink. You’re going to want to reconcile that difference that you see in your company’s value between the different methods. You can do this by doing the research into the company, the finances, the past spendings, earnings, growth projections, and such to calculate a number that should be similar. The rest is how you play the cards.

 

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