A business appraisal services company provides knowledge that allows business owners to foster growth, cultivate acceptable management practices, and serves for essential decision-making purposes. When a business owner knows and understands their business’s market value, they can also learn how to manage their business’s value through objective and subjective value drivers.
Ultimately, people seek out business appraisal services because of the knowledge and insight they deliver. The appraisal alone can help owners determine if it is an excellent time to sell, how to approach their current legal situation, or how they might improve the value of the company.
When Should a Company Seek Out Business Appraisal Services?
It’s common for business owners to unknowingly leave a substantial amount of money on the table when they sell their businesses. The typical reason for a seller walking away with a poor deal is that they didn’t have any way to defend their asking price.
Business owners frequently overvalue their company because of emotional value or undervalue the business, basing their asking price on their tax documents. The result is the same. However, they can’t defend, or don’t ask for, a reasonable sales price and ultimately don’t get what they should for their business.
Because of this particular issue, the buyer and their advisers can discredit the asking price piece by piece while the seller stands by defenseless.
When business owners use independent business appraisal services, they can have a greater chance of success in a fair deal. They can set a realistic asking price reflecting the business’s value and the market’s current state. Then the business owners have a reliable valuation to support them through negotiations and in establishing agreeable terms.
List of common useful benefits of using business appraisal services:
- Identify key value drivers.
- Assess major weaknesses
- Handle hidden problems
- Set a reasonable selling price
- Navigate estate planning options
- Manage a partner buy-out
- Consider factors for tax purposes.
- Weigh the value of a business in a divorce
- Establish exit planning for the seller
- Evaluate outstanding litigation obstacles
- Deliver greater confidence in handling negotiations
We’ve seen numerous business owners rely on general rules of thumb or casual advice from friends when attempting to appraise their business. Business owners come in with the same bad advice year after year. Of course, it usually isn’t intended that way. For example, many owners believe they can’t market the sale because they’re trying to keep it private. A skilled broker will understand how to market and introduce the asking price without compromising the privacy of the sale. The appraisal is the first step, and often one that people avoid until it’s too late in the process.
Business valuations call upon sophisticated and complex calculations with varying methods used depending on the specifics of the business, such as maturity, profitability, and more. Unless the business owner obtains a formal valuation, they simply won’t know if their asking price is too high, too low, or just right.
Various Business Appraisal Methods for Privately Owned Businesses
Establishing fair market business value is not as easy as it might seem. Imagine that a business has a willing seller and a willing buyer, and neither of them is under pressure or compulsion to buy or sell. Both parties have a reasonable knowledge of any relevant facts, and both are pursuing their self-interest in the exchange. That is an ideal situation, but it’s typically impossible to achieve, so it makes it extraordinarily difficult to visualize. Business appraisal services experts agree that this is particularly difficult to assess for privately owned businesses.
What this means is that the value of a privately owned business will depend on various factors, including:
- The financial strength of the business
- Strength of the industry
- Business position within the industry
- The dependency of the business on the owner
- The future viability of the company
Business appraisal services use three common approaches to handle valuing and assessing privately owned businesses. The American Society of Appraisers has developed standards for the asset-based approach, the market approach, and the income approach.
Income Value Appraisals
The income approach provides appraisers or brokers with several different ways to value a business today. They all use some selected level of earnings and match it to a corresponding conversion factor. When performed correctly, each of these methods should produce a similar value.
Using this approach for appraising a business focuses on the earnings of the company exclusively. The value uses an estimation of the income the purchaser could reasonably expect from the business. The computations generally declare that the businesses’ worth equals the expected future income divided by the return rate.
The Multiple Discretionary Earnings Approach is one widely accepted income valuation approach. It requires only two- steps and offers a fair amount of insight for professionals offering business appraisal services.
First, the business appraiser will identify the discretionary earnings that are likely to reoccur in the near future. They do this by averaging the discretionary earnings over the last few years or only the most recent year if there’s a reason to believe that it offers a more accurate reflection of future earnings. Discretionary earnings refer to reported pretax earnings plus the owner’s salary, interest expense, depreciation, and any personal expenses that run through the business.
Second, the appraiser will identify the multiplier. Finally, the discretionary earnings value times the multiplier produces the value of the business. This approach allows the appraisal expert and the business owner to see the impact of depreciation, personal expenses, and similar items. Often these elements need some correction or changes to help boost the value of the business.
Asset-Based Value Approach of Appraisal
The asset-based value approach, or the Cost Approach, uses assets to define the company’s value. An appraiser will determine the book value of each asset, then minus depreciation for some assets. Meanwhile, cash and marketable securities retain their face value, and inventory values vary based on type. All of these components within a business will receive a separate value, then the sum of those components will derive the total value of the business.
An appraiser will estimate those assets based on the cost of duplicating or replacing the individual assets. The next step would be to adjust the values to reflect their fair market value resulting in the adjusted book value.
Business appraiser services or brokers would take that adjusted book value and deduct liabilities, including short-term best at face value and long-term debt at a discount. After subtracting the liabilities from the adjusted book value, the result is the value of the business.
Market Value Appraisals
This approach is common among business appraisal services as it uses the purchase price of similar businesses in the market for the valuation analysis. Professionals then use financial ratios to compare the subject company to other companies and determine a set of appropriate multiples for use in the valuation. They then select an earning period, which is typically the last 12 months but may stretch back to the past 36 months. The appraiser evaluates the earnings and cash flow over those periods using those multiples. Finally, they determine a value based on how the company compares with the others.
Ultimately, a business appraisal services expert will determine the weight of each various appraisal method. They may decide that the value should come from a single method or that one or more methods may not be relevant to that company. Typically, the final report will include the rationale for selecting, or weighting, the method(s), used to reach the final value.
A Look Into the Business Appraisal Process
Properly determining the value of a business is a delicate and complex process. Business appraisal services refer to proven methods for evaluating, analyzing, and reviewing a businesses’ value and internal working components. When an owner chooses to use these professional services they access resources that aren’t often found in day-to-day business operations in nearly any industry.
Business appraisal services use a 5-step process for valuing and assessing the worth of a company:
- Determine the purpose of the appraisal and ownership interest.
- Obtain and review key business elements, including Corporate Documents, Financial Records, Key Personnel, Key Customers, Industry Trends, Comparable Sales of Similar Companies, and more.
- Identify the value indicators within the business and owned non-operating assets using 3 categories of appraisal approaches: Asset, Market, and Income.
- Use the obtained, reviewed, and analyzed information to determine the final indication of value while adjusting for goodwill and other intangibles the business possesses.
- Prepare a written business appraisal report.
Business appraisal professionals should have the ability to select appropriate appraisal techniques, work with a deep comprehension of today’s tax laws, have business experience, understand market conditions and work closely with corporate finance. Well-qualified and skilled appraisal experts will provide an unbiased business evaluation to serve as a benchmark, minimize ownership disputes, and provide realistic value indicators. These services can also produce a credible and defensible formal business valuation.
Get started with American Fortune. American Fortune provides business appraisal services as one of our three key services in addition to Business Exit Planning and Business Sale & Acquisition services. We have extensive experience in market appraisal, which comes from our daily involvement with Business Sales and Acquisitions and Exit Planning services. Our combined expertise and experience produce extraordinarily accurate, credible, and defensible business appraisals across a wide range of industries, including manufacturing, distribution, retail, healthcare, engineering, high technology, and banking and finance.
Business Valuations are governed by Valuation Standards Business Valuation Associations. The top two organizations are The Uniform Standards of Professional Appraisal Practice and The National Association of Certified Valuation Analysts.
American Fortune Business Appraisal Services has performed business appraisal services (business valuation services) in all areas of the USA.