Certified Appraisals and Business Valuations
Contact Lou today if you are looking for certified appraisals or a business valuation in the Raleigh area (or in all of North Carolina, South Carolina or Virginia).
What is a business Valuation?
A business valuation is the process by which the value of a business is determined. The method used to determine the value will depend greatly on the type of business in question. For example a law firm, which has very little physical inventory that’s of much value, would be appraised differently that an equipment rental business, which has quite a lot of physical inventory. In fact, there are almost as many methods of measuring value as there are types of businesses.
Why Are Business Valuations Needed?
There are several reasons why a business owner would be interested in knowing what his or her company is currently worth. Before a business can be sold, a business valuation needs to be conducted to establish a sale price for the company. Knowing the value of a business is also important for tax purposes, ensuring that taxes aren’t being over or under paid. In the event that a loan is needed from a bank, the business may be used as collateral, requiring the bank to know the value of the company.
What is the Business Valuation Process Like?
The process by which a business is valued will vary quite a lot depending on what kind of business is being reviewed. Some business rely on tangible inventory for their means of operations, such as rental companies, shops, and stores. Other businesses are based on services, with little to no liquid assets contributing to their value. This would include law offices, real estate companies, and advertising agencies. For these type of businesses, a monthly profits and losses sheet would be much more important for determining value than would inventory and liquid assets. Those two examples are only two of many types of possible business structures, each needing a different approach when determining value. The Handbook of Business Valuations by Thomas L. West is a great guide for what method should be used to value a business, based on what kind of business it is.
Use a Certified Appraiser
Over 80% of Business Appraisers Still Remain UnCertified but you‘d better think twice before signing on the dotted line of that listing agreement. Hiring the wrong Business Broker could cost you both your shirt and the family store.
The IRS And Others Will No Longer Close Their Eyes Or Look The Other Way When It Comes To An Accurate Value For Your Machinery and Equipment… Just Remember: There Are Stiff Penalties For Non-Compliance!
Not All Appraisals Reports Are Equal! BEWARE Of Unsubstantiated Values Find Out What You Need To Know Before You Make A Costly Mistake. So how do you go about choosing the right Business Broker for certified appraisals? There‘s really no short answer but here are some general guidelines:
- What is the broker‘s professional background, or does he even have one?
- How long has the Broker been in business?
- What professional associations a member of?
- What training or certifications has he achieved?
- Do the documents look professional?
- Does the Broker follow through?
- Are phone calls returned?
- Does the broker or his company have a professional looking website?
- Is the Broker overly pushy or anxious about getting you to sign?
- A Business Broker should put his client‘s best interests first and not be overly pushy about sealing the deal until both parties feel comfortable with all the details.
What is Business Valuation Like From the Perspective of the Seller?
Like buying and selling of anything else in the world, a person selling a business will try to increase its value as much as possible, while the buyer will look to lower it in an effort to save money. For this reason, it is common for independent intermediaries to help assist in the valuations process to make sure a fair price point is established. Even so, there are ways that the seller can try to increase the perceived value of his company.
The seller will look to highlight all of the strengths of his or her business, while downplaying its weaknesses. A large portion of a business’s value will be based on concrete numbers, like monthly profit and loss sheets, and tax appraisal value. But some factors are less quantifiable, and can be valued differently based on individual interpretation. An example being the estimated value of a trademark, or website. These factors can vary widely depending on the type of business being valued.
Areas that a seller might want to focus on highlighting are location, brand recognition, reputation, or any other factor that has a value that’s fluid, and not easily measured. For many business, how the business views itself is much less important than how it’s viewed by it’s customers and competition. By using those perspectives, an owner can leverage the business’s value in his or her favor.
What is Business Valuation Like From the Perspective of a Buyer?
The process of determining the value of a business is a tug of war between all of the involved parties. Buyers, sellers, intermediaries, banks and lenders, and the IRS all have different, sometime opposing, goals in mind, and all will work in their own best interest. From the buyers perspective, it’s best if the business is valued at a point that makes it more affordable, but still valuable enough to be worth buying.
When a business is for sale without the use of a broker or intermediaries, the buyer may have to conduct his or her own valuation. Using a professional business consultant, the set price for the business will be reviewed to see if it accurately reflects the value of the business. The consultant will conduct a thorough analysis, which will involve taking photographs, reviewing the age and condition of inventory, assess the customer base, determine the value of the lease, and collect customer reviews.
The buyer will always be interested in a lower estimated value than what the seller had in mind. It’s no different than any other type of sales negotiation. Everyone wants to pay less and get more. To help meet closer to the middle, the seller is likely to highlight certain perks and benefits of owning the business that may not be apparent at first. Different business’s will have different ways of being valued, so these perks will depend on the type of business being sold.
By negotiating through an intermediary, this gap can be more easily bridged. When negotiating without one, it’s up to the buyer and seller to come to a middle ground value they both agree on.
Business Valuation From An Accountant’s Perspective
An accountant’s perspective on business valuations is a complete reversal of that of a certified business valuation professional. Where a valuations professional will be including certain factors that are difficult to quantify into the process, an accountant will primarily only be looking at profit and loss sheets and tax information.
But numbers don’t always tell the whole story. There are many more factors that contribute to the value of a business that just profits, losses, taxable value, and inventory. Accountant’s are great for keeping track of cash flow through a business, but they can’t truly value a business the way that a a valuations professional can.
In a situation where a business is for sale, and the seller has a letter of intent from a prospective buyer, the seller may want the offer to be higher than it is currently. The sellers accountant may offer a perspective on the offer that shows certain benefits or tax advantages for the offer as it stands, but it’s important the the accountant doesn’t attempt to re-value the business in order to fit the offer. Many details can be over looked, and it’s unlikely that the seller will get a fair price for his company if he relies on an accountant to value his business.
What is a Business Valuation Like From the Perspective of the Lender?
When buying a business that’s for sale, it’s not at all unusual for the buyer to borrow money to make the purchase. The lender, whether it’s a bank, credit union, or any other type or loan agency, is going to have a different perspective on the situation than the buyer or seller. Because they’re putting money on the line, they want to minimize their risk as much as possible, which means they well typically be much more harsh and conservative with their estimates on the value of the business.
Lenders are very likely to under-value a business in order to limit the amount of money they put up and potentially lose. A seller will attempt to inflate the value of his business, a buyer will attempt to limit it, but not nearly to the degree that the lender will. Rather than using a fair market value for a business, which is how much the business would likely be bought or sold for, a bank will use the liquidation value. The liquidation value is how much it’s estimated to be worth if it is seized by the lender and sold off in parts. In that event, the inventory and physical assets have a diminished value, but the good will, customer base, and public perception are worthless. A liquidation value is sometimes as little as 10-20% of fair market value.
With there being a huge difference between what the buyer estimates the business to be worth, and the bank’s perception of the business’s value, there needs to be a way of filling the gap in order for the bank to become whole in the event that the borrower defaults on the loan. If a buyer intends to borrow $200,000, but the bank has put a $40,000 liquidation valuation on the business, $160,000 is collateral will be needed to fill the void between the two. Houses, cars, and other properties owned by the buyer can be used to guarantee the loan, but could be lost if the business fails.
What are Business Valuations Like From the Perspective of an Intermediary?
In the process of selling a business, there are more than just the buyer and seller involved. As each is acting in their own best interests, which are often in opposition of one another, a third party is often asked to help negotiate. An intermediary, or business broker, is used to help the buyer and seller meet in the middle on a fair price for the business being sold.
While it’s possible for the seller to work directly with a potential buyer, it’s not recommended. It is often said that, like a lawyer, a seller that represents him or herself has a fool for a client. Having an independent third party provide fair and neutral guidance is a much better means of a successful negotiation. The main goal of an intermediary is to help bridge the gap between what the seller wants and what the buyer wants.
An example of one of the disputes that may arise, of which there are many, is when a business is being valued with an assumed salary for the owner. The seller may feel that $100,000 a year is an appropriate salary for the position, and value the company accordingly. The buyer, on the other hand, might feel that the position only warranty $50,000 annually, and would then expect to pay less for the business based on that change. It’s the intermediary’s job to find a middle ground salary that both parties can agree to for the purposes of negotiation.