Business Valuation: Everything a Business Owner Should Know

The motive to find the value of a business might range from buying/selling business decisions, raising capital through borrowings, planning strategic mergers and acquisition plans etc.

The below article throws light on some of the major issues faced during business valuation and tips on how to deal with such issues.

Issue 1: How to select the right business evaluator?

Ask this simple question “Am I qualified and experienced to evaluate my own business?”

If it is an unchartered territory seek business professionals listed below who usually offers such services:

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.

Issue 2: What are the most commonly followed business valuation techniques?

There are many methods to find the value of business but the most popular methods adopted by professional and experienced business brokers are the following:

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 discretionary cash flow, since most Main Street businesses are bought and sold on a multiple of annual cash flow.

Formal Business Valuation:
It involves financial analysis, review of the Balance sheet with support documents containing reviews of companies historical and project earnings.

M&A Valuation:
The Mergers and Acquisitions 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.

Issue 3: What are the preparatory information and documents required for business valuation?
Following is a checklist of documents and information that professional business advisors ask prior business valuation:

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.

Issue 4: How is the business valuation undertaken?

Adopting a right business valuation process ensures the sale of business will bring in a better sale price compared to arbitrary valuation of business.

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 business 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. 

A planned business valuation involves lot of procedures and systematic planning to ensure the right value is found out to help sell business.