Must Read Guide to Business Valution

Know Key facts about business valuation

If you are a business owner, you will definitely be curious about the value of the business. Business valuations are undertaken whether one is planning to buy a business or sell a business, for mergers & acquisition strategies, borrowing funds, raising capital or before making retirement plans. There are numerous personal and business reasons to find the worth of your business. This article covers all the major points to be considered while going for business valuation.

 
 
What is your business worth? As a business owner you must have definitely asked yourself this question at some time or other. If you are in unchartered territories when it comes to business valuation, the below points will help you navigate the journey in a much better manner.
Below are the list of key facts you should know before planning business valution procedure:
Selecting the right business evaluator:
Professionals who offer business evaluation services are:
  1. CPAs offer business valuation services. The knowledge gained from handling various accounting,  finance and tax work allows an experienced CPA to gain knowledge that is well suited for valuing a business
  2. Financial experts/consultants (Non-CPA) can also lend their expertise, but their background and experience needs to be investigated carefully before hiring them.
  3. Business Brokers are an obvious choice to value the businesses for sale as they have many years specialization in buying business and selling business which involves business valuation.
  4. Commercial Real Estate Brokers/Agents are good at appraising real estate, but lack skills and experience to properly value intangible assets like goodwill.
One should also check industry credentials through: The American Institute of CPAs (AICPA) or The American Society of Appraisers or The National Association of Certified Valuation Analysts (NACVA) or The Institute of Business Appraisers
Find the right business valuation technique for your business:
There are many business valuation methods. You need to study and select the one which fits your business and industry type to provide the correct value. Some of the common methods used are:

Letter of Opinion: The Letter of Opinion is a restricted use valuation intended for small companies with sales less than $250,000. The basis of this valuation is a market comparison with like companies within an industry. 

Value Analysis: The Value Analysis is a restricted use business valuation designed specifically for the “main street” business with sales of $1,000,000 or less. The basis of this valuation is discretionary cash flow, since most Main Street businesses are bought and sold on a multiple of annual cash flow.

Formal Business Valuation: The Limited Formal Valuation is a restricted use business valuation intended for the standard small business with sales between $1,000,000 and $5,000,000. The bulk of the report is financial analysis, review of the Balance sheet with support documents containing reviews of companies historical and project earnings.

 M&A Valuation: The Merger & Acquisition Valuation is a comprehensive business valuation for transactional purposes and is developed in accordance with the Uniform Standards of Professional Appraisal Practice (USPAP).

 IRS Revenue Ruling 59-60: A USPAP governed valuation developed for litigation focusing on US Court Reviews, Cited Court Precedents, and in-depth analysis and research of minority and marketability discounts. This method is intended for Estate Tax, Gift Tax, ESOP’s, Divorce, and any situation requiring litigation.
Checklist of Documents & Information to be kept ready:
Financial Statements:
These includes balance sheets, income statements, statement of changes in financial position, stockholder’s equity or partner’s capital holdings statements for last 5 fiscal years, list of subsidiaries, list of equipments, depreciation schedule, aged accounts receivable or payment, prepaid expenses, inventory list, leases (if any), existing contracts with employees, suppliers, franchise agreements, customer agreements, royalty agreements, equipment lease or rentals, loan agreements, labor contract, employee benefit plan, compensation schedule for owners, insurances in force, budgets of projects, if available.
 Company Documents:
These includes, articles of incorporation (if any), by-laws, any amendments to either, corporate minutes, partnerships, articles of partnerships (with any amendments) along with list of existing buy/sell agreements, options to purchase stock or partnership interest , or rights of first refusal.
 
 Other Information:
Also keep ready details of company history, changes in ownership and /or bona-fide offers received. Also describe the position as compared to competitors or any other factor making the business unique, relevant marketing literature like brochures, advertisements, list of location where company operates, details in terms of size, and whether it is fully owned or leased. List of states in which the company is licensed to do business, list of current customers, suppliers, major accounts. Resumes of, or list of, key personnel, with age, position, compensation, length of service, education and prior experience. List of memberships with Trade associations or would be eligible for membership. List of any patent, copyright, trademark, and other intangible asset along with correspondence with regulatory agencies for issues related to business.
 
Understanding the Business Valuation Process:
 
Basically there are 8 steps for business valuation. This might differ on case to case basis:
 
Step 1: The Broker meets with the client to determine what type of valuation is required. 
Step 2: During the meeting, the Broker will assist in the completion of the Company Profile information needed for the type of valuation selected. 
Step 3: Once the Company Profile has been completed the package of information is mailed, faxed, or emailed to third party Valuation Analyst. 
Step 4:  The Valuation Analyst will review the documents and begin the valuation.
Step 5: A completed Company Profile is then generated, and all questions that arise are answered.
Step 6:  The Analyst will issue a preliminary review of the valuation. It assures that all details have been considered and allows for any adjustments based on new information or further clarifications. 
Step 7: Once the review with the Broker has been conducted, the Analyst will finalize, print, and send the final valuation report. 
Step 8: The Broker will receive hard copies and an electronic copy (if requested) of the final report. This report is sent to the business seller/owner. 
Tips to increase the Value of your Business:
Last but not the least, there are few pointers that will help to increase the value of your existing business.

Keeping an Optimistic Attitude: Project an optimistic attitude to maintain positive outlook for the future of the business.

Practicing Healthy Managerial Style: Owners who put themselves in the trenches are in touch with the business -- and this first-hand understanding will be evident to anyone taking stock of the company’s worth. The owner’s style should include appropriate delegation of duties and a backup managerial plan in case of unforeseen calamity.

Focusing on Growth, Strategy & Vision: Business owners should be prepared to spend what it takes to generate new business, and should take the time to outline new possibilities for long-range success.  If the company currently has no mission statement or business plan, creating one will speak volumes about owner’s enthusiasm for the future of the operation. 

Customer focus your mantra for success: If the business owner has created goodwill with the customer by having high retention rate and growing customer loyalty, this will considerably increase business value. Ensure your business does not alienate regular customers.

Protected brands ensures more value: Registered trademarks, patent and brand loyalty also increases the value of business. Ensure your business has carved a strong powerful brand in its niche to stand out against competition.

The real value of any business is reflected through it's owner's attitude, work habbits, managerial stye, reputation within the community and relationship with it's existing employees, vendors and customers. It is advisable to seek professional business brokerage services to help evaluate your business to find it's right worth.
 
*Disclaimer:

The above article is for information purpose only . It is intended to discuss in brief about commonly followed practice and industry-known principles with regards to business valuation.  Applicability of this information is subject to change from time-to-time or differ from case-to-case basis. Readers are requested to verify their individual case facts with a qualified Business Valuation professional before proceeding with business valuation.

Comments


Rincy Roosevelt

Useful Article

Thanks for sharing such useful tips. It captures all the major issues in one short page. Going to bookmark this for future reference!

Last edited Nov 30, 2008 11:01 PM
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Anonymous

Awesome article

I was not sure that i could find something so informative as this..... Hundred times better than reading a big fat book on business valuations or attending some boring few hours lecture. thanks mark and knol

Last edited Nov 28, 2008 6:02 AM
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