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.
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