The objective to find the value of a business could range from buying to selling business decisions, building up resources through borrowings, planning critical mergers and acquisition plans etc. The below article clarifies some of the major challenges faced during business valuation and suggestions on how to deal with such issues.
Issue 1: How to choose the right business evaluator?
Ask this simple question “Am I certified and experienced to examine my own business?” If it is an unchartered territory seek business professionals (see below) who usually offers such services:
1. CPAs provide business valuation solutions. The understanding gained from handling various accounting, finance and tax work allows an experienced CPA to gain knowledge that is well matched for valuing a business.
2. Financial experts/consultants (Non-CPA) can also provide their expertise, but their background and expertise needs to be examined carefully before hiring them.
3. Business Brokers are a clear choice to value the businesses for sale as they have several years specialization in buying business and selling business which entails business valuation.
4. Commercial Real Estate Brokers/Agents are efficient at appraising real estate, but do not have the skills and experience to properly value abstract assets such as goodwill.
Issue 2: What are the best typically used business valuation techniques?
There are many approaches to find the value of business but one of the most popular approaches adopted by experienced and professional business brokers are the following:
The Value Analysis is a discretionary cash flow analysis, since most Main Street businesses are bought and sold on a multiple of yearly cash flow of the business.
Formal Business Valuation:
It consists of financial analysis, evaluation of the Balance sheet with supporting documentations containing reviews of companies and their historic and venture earnings.
Letter of Opinion:
The Document of Opinion is a restrictive valuation format intended for small companies with sales less than $250,000. The justification of this valuation is a market contrast with similar companies within an industry.
The Mergers and Acquisitions Valuation is an extensive business valuation for transactional purposes and is created in accordance with the Uniform Standards of Professional Appraisal Practice (USPAP).
IRS Revenue Ruling 59-60:
A USPAP governed valuations established for litigation with emphasis on US Court Reviews, Cited Court Precedents, and thorough analysis and research of minority and marketability discounts.
Issue 3: What are the preparative information and documents necessitated for business valuation?
The following is a checklist of files and information that professional business advisors request preceding business valuation:
These consists of balance sheets, income statements, statement of changes in financial position, stockholder’s equity or partner’s capital holdings statements for past five 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, and budgets of projects if available.
Step 1: The Broker consults the customer to determine what form of valuation is required.
Step 2: Throughout the meeting, the Broker will help in the fulfillment of the company’s Profile information needed to determine the form of valuation chosen.
Step 3: Once the Company Profile has been finished the package of information is mailed, faxed, or emailed to a 3rd party Valuation Analyst.
Step 4: The Valuation Analyst will assess the documents and initiate the valuation process.
Step 5: A completed Company Profile is then produced, and all questions that emerge are answered.
Step 6: The Analyst will release an initial assessment of the valuation. It guarantees that all particulars have been considered and permits any adjustments based on new information or additional clarifications.
Step 7: Once the evaluation with the business broker has been performed, the Analyst will conclude, print, and send the final valuation report to all necessary parties.
Step 8: The Broker will be given hard copies and an electronic copy (if requested) of the finishing report. This report is sent to the business seller/owner.
A prepared business valuation consists of a number of procedures and systematic planning to ensure the right value is ascertained to help sell the business.
Issue 4: Exactly how is the business valuation carried out?
Adopting the right business valuation process ensures that the sale of the business will produce a better list price compared to an arbitrary valuation of the business.
These documents consists of, articles of incorporation (if any), by-laws, any amendments, corporate minutes, partnerships, articles of partnerships (with any amendments) along with listings of any existing buy/sell agreements, options to acquire stock or partnership interest, or rights of 1st refusal.
Other Information required for the valuation :
Description of the company’s market position as compared to competitors or any other elements that will make the business unique, such as 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. Other things considered are the list of states in which the company is licensed to do business, list of current customers, suppliers, major accounts. List of any patent, copyright, trademark, and other intangible asset along with correspondence with regulatory agencies for issues related to business.