How Do You Place a Dollar Value on a Business?

Jan 31, 2013

business valuationWhen you’re entering the world of business ownership for the first time, it may be tempting to believe everything you are told by the current owner, but even the most honest-looking sellers can twist the truth a little. In a questionable economy where every dollar counts, it’s important to check with a business valuation specialist before you make the decision to buy. Business brokers will rely on a number of different industry-specific formulas and other sources to help you come up with the right bidding price, but it helps if you understand their methodology.

What goes into a business valuation?

While every industry has its own variables for calculating the resale value of a business, it may be difficult to know the true price until a professional consultant reviews their financial statements. In addition to cash flow, debt and business assets, valuation specialists look at a company’s competitors, customer base, reputation and market share.

How to find the most negotiable properties

Just like in residential real estate, business buyers can benefit from buying a “for sale by owner” enterprise. Many entrepreneurs rely heavily on internet business directories because they allow the viewer to search by industry, price and location. While it is not a reliable valuation tool, it can help to compare prices of businesses for sale with a focus on your desired location and industry.

Business directories allow you to look up regional and national businesses for sale and it tells you a lot about the overall health of the industry, how long you can expect to wait before turning a profit, and the average cost to get started.

Don’t feel pressured to make a bid

No matter what the business owner tells you, it is rarely “urgent’ that you purchase the business immediately, and beware of sellers that expect a quick decision. Doing your due diligence is an absolute must, regardless of the seller’s urgency. You will still need a proper evaluation before making an offer. In addition to weighing the health of the business with the cost of ownership, remember what your stockbroker always says: “Past performance is no indicator of future results.”

What does a valuation show the buyer?

Company valuations can be undertaken for many purposes and they draw on a wide range of methodologies. Consequently, the often yield divergent values. Remember, appraisals are snapshots in time not a 10-year average. Economic and industry conditions at the time of the appraisal will play a role it the final price range, and it also depends a lot on whom, when and why you’re asking.

How do you choose a valuation expert?

Whether you are considering a valuation for potential ownership, tax purposes or investors, you will need to know the type of valuation you need and who should pay for it. If you want an in-depth appraisal for legal reasons, be sure to choose a valuation expert whose work will withstand detailed inspection. He or she should be able to defend their conclusions and explain their methodologies.

Business valuation experts will often have several letters after their names, but few of them will be familiar to you. These include an ABV (Accredited in Business Valuation), CVA (Certified Valuation Analyst), CBA (Certified Business Appraiser) or ASA (Accredited Senior Appraiser). While it is certainly not necessary to have all of these certifications, business owners should expect valuation experts to have at least one of them.

Are business appraisals an accurate estimate of the sale price?

It all depends on the competitiveness and marketability of the business concept. While valuations performed by professional appraisers may accurately estimate the eventual sale price of a company, they do not always reflect market value, particularly if the appraisal was originally undertaken for a different purpose. Valuations that are conducted for selling a business should be done by appraisers who have experience in the market or industry, and who are aware of the acquisition appetites of potential buyers.

When real estate agents advise clients on bidding, they may look at “market comps” for similar properties sold in the area. Obtaining sale prices for businesses is notoriously difficult because privately held companies are not required to reveal this information and financial details are generally considered confidential.

Should you get a second opinion?

While professional business appraisers and merger & acquisition advisers may differ slightly in their assessments of a company’s value, owners should never feel uncomfortable about seeking a second opinion. Those who have already paid for in-depth valuation reports can use those documents to educate potential buyers about their companies’ strengths and operating results.

When you are ready to buy a business, take the time to do your research and accurately assess its value. Paying too much for a company, no matter how much potential it has, will severely impact your return on investment.

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