Simply put, a business valuation or business appraisal is a formal process of determining what a business is worth. The process of valuing a business is often complicated with many nuances and complexities that must be accounted for and factored into the final value of a company. An accredited business valuation professional has the experience, resources and processes to make this process easy for all involved and, more importantly, to determine a fair market value that can be trusted and defended with buyers, lenders, partners and government agencies.
There are multiple approaches and methods to value a business. Each method has advantages and disadvantages and, depending on why a valuation is being conducted and what type of business is being evaluated, may be more or less appropriate for your specific situation. Once again, the expert perspective of an experienced professional will help remove any guesswork and will ensure that your valuation is done using the most appropriate techniques. Business valuation methods include:
- Asset-based valuation – value is determined based on total assets minus total liabilities
- Market valuation – value is based on comparisons to sales of similar businesses
- Discounted Cash Flow valuation – value is based on projected value of future cash flows discounted back to present day value
- Income valuation – value based on company’s current profits, future profit potential and the return a potential buyer could expect to make on their investment
There are additional ways to value businesses – using multiples or multipliers, using book-value of assets, etc. but those listed above are the most common. Only a business valuation professional can advise on which method or combination of methods is best for your specific circumstances.
An independent, professional business valuation will eliminate estimates and guesses, allowing a business owner to know exactly what their business is truly worth. It will clearly identify the tangible and intangible value of a business for existing business owners, potential buyers, investors, lenders and other relevant parties. Without a professional business valuation, a company’s value could be based on heavily biased opinions (typically the owner or their CPA) and will not be respected or recognized during formal financial conversations or dealings.
Our nationwide network of certified professional business appraisers offer both virtual and “localized” fulfillment models. Business owners will be paired with the most qualified business appraiser who can best meet their unique needs. The valuation professionals deemed to best suit your needs will conduct the actual business valuation using his/her advanced systems, applications, processes and technologies. We also work to ensure a credentialed appraisers are the ones your company works with including designations from appraiser organizations such as ASA, IBA, NACVA and the AICPA. We also have partners specializing in selling businesses, where the Certified Business Intermediary credential from the IBBA is credible for opinions of value.
Should you require in-person services, the identified valuation professional will provide confidential and discreet, in-person advice, services and support, when possible. Their responsibility is to ensure that all necessary information about your business is gathered, reported and accurately prepared under the strictest levels of confidentiality. Their goal is to become intimately familiar with your business through face-to-face meetings and ongoing discussions with you, the business owner.
Yes! There is a significant difference between “book value” and “fair market value”.
“Book value” is an accounting view of the business. This approach reduces the value of items owned by a business for tax purposes based on total assets minus total liabilities As a result, “book value” does not provide an accurate economic or market value perspective on the entire business and its operation.
“Fair Market Value” identifies the true economic value of a business, its assets and its income generating capacities. There are many techniques involved in calculating the “fair market value” of a business to ensure accuracy and fairness. Consequently, this perspective is what a potential buyer and willing seller would agree on when a business is sold, neither being under compulsion to buy or sell and both having reasonable knowledge of relevant facts.
The majority of CPA’s do not concentrate or focus their work on a single specific industry and most are not fully-capable of conducting an accredited, high-quality, cost effective business valuation. Many have limited experience in conducting market research, assessing market comparables and understanding the dynamics at play in complex buy-sell transactions.
That said, there are CPA firms that have a specialization in business valuations particularly through the member support of the AICPA but those firms are typically geared towards very complex events such as 409A compliance, resolving or addressing tax issues, ongoing litigation, etc. Complex, specialty valuations typically cost many tens of thousands of dollars or more.
One of the most common questions we hear from business owners is “How much should a business appraisal cost?”. The answer is simple – business valuation prices can vary dramatically from firm to firm. There is no one size fits all answer or typical small business valuation cost. This is because every provider’s specific areas of expertise, available resources, geographic restrictions, infrastructure, etc. vary as do the needs and complexity of the business under review. Traditionally, professional business valuations will cost anywhere from $3,000 to $30,000+ based upon complexity, location and industry.
Fair Market Valuations is proud to partner with experienced and qualified business valuation providers with reasonable and fair engagement fees typically ranging from $5,000 to $15,000+. In addition to receiving industry-respected, professional business valuations, our clients also receive significant benefit from the exploratory meetings they have with our network of professional experts.
Business multiples can be used to give an owner or potential a back of the napkin estimate on a company’s value in the absence of a business valuation report; the two most common multiples are based on revenue and cash flow. Price-to-Sales (P/S) ratios can be used for revenue multiples across industries based on company stock values. Industry sectors, business lifecycle, geography, macroeconomic factors and other variables will skew multiples so take them with a grain of salt for your own privately-held business. Cash flow multiples are derived from EBITDA and SDE (explanation below) which require owners to calculate accurate earnings and then leverage industry multiples.
Checkout research from NYU Stern School of Business for revenue multiples across more than 100 industry sectors and for more in-depth reading alternative multiples, the team at CFI has a comprehensive guide.
SDE (or sometimes called Seller’s Discretionary Cash Flow or financial recasting) is a calculation of the total, annual financial benefit an individual business owner or operator gets from the business. It combines profit before tax, interest, one-time expenses and owner benefit. These discretionary owner benefit are expenses are paid for by the company but personally benefit the owner. Common examples include retirement contributions, home improvements, vacations, automobile expenses, family cell phones, etc. These costs to the business were optional by the individual owner and should be added back into the earnings of the business so that prospect buyers can determine if they leave that money in the business or benefit themselves, individually. SDE is most often determined for the sale of a small or ‘main street’ business and can come with some debate between seller and buyer into the validity of the recasting, which ultimate impacts business value conclusions. For mid-market and larger companies, the metric most often used in place of SDE is EBITDA (Earnings Before Interest Depreciation and Ammortization).
When buying a business, buyers often incur costs for planning, negotiating, brokering and conducting due diligence research. Depending on the specific details, portions of those costs may be tax deductible. Buyers can typically write off up to $5,000 for some of the costs involved in buying a new business – usually these include the costs of investigating whether the company is a good purchase. These costs can be things like product analysis, site visits and market research. For sellers, the write-offs are different and typically involve subtracting the costs of research you incurred before selling the company (over/above any previously taken tax credit) from the profits you make on the sale of the company. This is usually not a straight deduction, but does serve to lower the seller’s taxable gains.
Tax laws can and do change frequently and your best bet is to bring a trusted tax advisor into the buy/sell process to ensure that you get all of the tax breaks and advantages available to you.