Business Valuation: The Process and Methods (Explained)
There are more than 33 million small and medium-sized businesses scattered across the US. Many of those businesses are concentrated in urban areas, such as the metropolitan St. Louis area. The simple population density concentrates people with entrepreneurial leanings into a small area.
Despite all of the hard work and long hours, often 50 hours a week or more, there does come a time when most business owners are ready to pack it in. If they want to sell the business, rather than simply close, they’ll need a business valuation.
Not clear on the nature or use of a company valuation? Keep reading and we’ll cover the essentials of the valuation process and methods.
What Is a Business Valuation?
In simple terms, a business valuation aims at creating a realistic assessment of the business’s economic value. Some business valuations assess the value of the entire business, while others only look at evaluating part of the business.
For example, let’s say that you run a medium-sized manufacturing concern. You have two production plants that serve two different kinds of clients.
Let’s say that you’re the sole owner and want to retire. If you don’t have someone in mind to take over the business, you may decide to sell it.
If someone comes along and only wants to buy one of the production plants, you’d do a partial business valuation. If someone wanted the whole business, you’d do a full valuation.
Uses
The most recognizable use of business valuations is for the purpose of selling the business. It’s not the only potential use for a valuation.
In some cases, potential investors might want a valuation before deciding if or how much they’ll invest. Business valuations happen sometimes during divorces to ascertain the full scope of the couple’s assets.
You might also want a valuation for tax planning, estate planning, or even for mediation with stockholders.
What Is the Business Valuation Process?
The exact steps taken in a business valuation process depend in part on the particular valuation method selected. We’ll cover the main methods below. What follows is a general sequence of events that occur in most business valuations.
Determining Scope
The individual or company providing the valuation will look for clarity about the scope of the valuation. For example, are they determining a value for the entire business, part of the business, or a specific number of stock shares?
As part of this step, they’ll also want a specific date for setting the value, since the total value can fluctuate over time. In many cases, they’ll simply set the date for the business’s most recent tax filing.
You must clarify what the report is for. If you need it for estate planning, rather than litigation, the depth of the valuation may vary. They’ll also need to know what kind of report you need, as reports can range from basic summary reports to in-depth reports.
Document Production
The valuation service will likely ask you for a lot of documents. The exact documents will vary from business to business and industry to industry.
For a retail business that depends on a high volume of transactions, the company may want fairly in-depth sales reports. For a business that makes approximately 6 custom yachts per year, a profit and loss statement might suffice.
In most cases, the company will provide a specific list of documents it wants.
Analysis
The valuation service will then analyze the information. They’ll typically compare it with industry information, since this can shed light on whether business profitability is average, above average, or below average.
Management Discussion
Depending on the analysis results, the valuation company may also come up with a set of follow-up questions for the owner or management team. This kind of management discussion typically focuses on clarifying information or understanding factors that the documents may not make clear.
Final Analysis
After that discussion, the valuation company will use one of the methods below to develop a final valuation. They’ll issue a report that the business owner can then provide to potential buyers.
This process can move quickly or slowly, depending on the size, complexity, and industry of the business.
Business Valuation Methods
There are several business valuation methods that a valuation company might employ to value a business. Let’s take a quick look at the most common approaches.
Book Value
Book value is one of the simplest approaches. It essentially adds up all of the assets on the business’s balance sheet. Then, it subtracts all of the liabilities on the balance sheet from the total asset value.
Liquidation Value
The liquidation value assumes that you own a distressed business. This approach adds up the value of your assets and subtracts a percentage from that value for a final value. The valuation company must determine the exact percentage it will subtract.
Market Value
Market value can take a couple of forms. A basic market value approach simply multiplies the number of shares in a company by the going sale price of that stock.
A more complex version compares similar companies to arrive at a relative value for the business. This approach can provide a better real-world picture, but it is also subject to market errors like as an industry bubble overvaluing businesses.
Discounted Cash Flow
The discounted cash flow approach assesses the immediate value of predicted future profits. In this approach, the size of the discount applied to that value reflects the risk that the business will underperform.
Each approach has benefits and problems. Ideally, you should get multiple valuations based on different valuation methods for a clearer picture.
Business Valuation and You
Business valuation is a tool that you can use to determine a realistic asking price for a business you want to sell. There are several possible valuation methods that you can use, but multiple valuations give you the most clarity about your business’s ultimate value.
Fortunately, while the methods of business valuation can prove complex, you can hire someone else to take on that headache.
Fusion Business Services helps St. Louis-area business owners value and sell their businesses. For more information or to schedule a consultation, contact Fusion Business Services today.
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5 Elements for Buyers to Investigate
When you’re in the process of buying a business, it’s important to stay logical. No matter how good the opportunity may seem at first glance, be sure to carefully evaluate the business in a step-by-step manner. Regardless of how excited you might be about the prospect of ownership; you’ll want to have your guard up when you go through the due diligence process. Let’s take a look at 5 of the most important questions to ask yourself before signing on the dotted line.
1. Do you have a personal interest in the business?
Needless to say, owners have made businesses successfully thrive even if they lack a personal interest in what is being sold. However, you might want to stop and ask yourself if you do indeed have a passion for the goods or services offered by the business in question. If you are uninterested, you may find it harder to make a long-time commitment.
2. What is the business plan like?
It’s helpful to see the goals of the current owner and evaluate which of these goals have actually been achieved. If there is no business plan, this should give you pause.
3. How does the business perform?
Take a look at the business’s overall performance. Do you get the feeling that the business requires many hours of intensive work from the owner? If so, remember that this owner putting in all of those hours could be you in the near future. Is there a reliable manager to oversee operations in your absence?
4. What are the demographics?
Who are the key customers? Are there several main accounts that the business depends upon or a wide variety of customers and clients? Needless to say, if the business relies on just a few key accounts, this could be problematic if things were to change. Further, do you see a clear way to add new customers in the future? Before you buy a business, you’ll want to feel confident that you can help it thrive and grow.
5. Are you satisfied with the financials?
Once you’ve successfully signed the necessary written agreements, you’ll want to take a deep dive into the business’s financials. Make sure that everything has been provided including:
- Tax returns
- Profit and loss statements
- Balance sheets
- Bank statements
The bottom line is that you will want to be careful when purchasing a business and watch for any red flags. The last thing you want is to make a hasty decision that you regret later on.
Copyright: Business Brokerage Press, Inc.
The post 5 Elements for Buyers to Investigate appeared first on Deal Studio – Automate, accelerate and elevate your deal making.
8 Important Things to Know (And Ask) When Buying a Restaurant
Nothing comes close to the exciting buzz of opening a new business. However, the average startup costs for a new restaurant business are between $275,000 and $425,000. Buying an existing restaurant could be the perfect option if you want to avoid the turmoil (and startup costs) of starting one from scratch.
Before you jump into your new venture, there are some essential things to consider. Firstly, running a restaurant is not for the faint-hearted! It would help if you also researched the prospective restaurant thoroughly to avoid any nasty legal surprises.
This guide will walk you through what to know (and ask) before buying a restaurant.
1. Why is the Owner Selling the Restaurant?
Is the owner retiring or starting a new venture? Understanding why the owner is selling their restaurant can provide insight into how the business is performing. Speaking to the owner is also a great way to learn about the brand and story behind the company.
Working with a professional, knowledgeable business broker can help you gain access to helpful information and uncover the seller’s motivation for selling. A broker can use this information to negotiate a better price for the buyer.
If the owner struggles to generate profits, you may need to rebrand and make drastic changes. If the restaurant was successful, would they be selling it? Remember that you will inherit the good, the bad, and the ugly when you buy a restaurant from the previous owner.
2. Location, Location, Location
The best way to research a location is to visit as a customer. Check out the area and take notes on the competition. Your findings will give you an idea of whether the site is popular and how other businesses perform in the vicinity of the restaurant.
Learning about the location will also tell you if the rental rates are fair for your property. Crime rates and new developments can also have an impact on the performance of a restaurant.
3. What is the Restaurant’s Reputation?
You can ask the locals what they think of the restaurant as you research the local area. Do they dine in or take out? Do they enjoy the food?
Lots of restaurants have loyal customers who visit them regularly. Observing the restaurant from a customer’s perspective will allow you to identify whether your prospective restaurant has a loyal following that you will inherit.
Checking online reviews will give you an idea of the restaurant’s reputation within the local community and beyond. Pay attention to negative feedback and consider how you would address their issues when you take over the restaurant.
4. The Competition is Fierce
There were 660,936 restaurants in the US as of 2021. Your restaurant must have a unique selling point if you want to succeed in the restaurant industry. It’s a good idea to include a non-compete clause in your contract to prevent the seller from opening up a similar restaurant nearby.
Establish the restaurant’s unique selling point (USP) by conducting a competitive analysis and tracking industry trends.
5. Existing Employees
When you buy an existing restaurant, you also take on the staff. Identifying which employees are critical to the restaurant’s success should be part of your due diligence before you complete the purchase. Some employees may wish to terminate their employment if a new owner takes over the restaurant.
Your new employees are a direct connection between you and your new customer base. They can teach you everything there is to know about your new business and how to help it succeed. Taking their opinions on board will be crucial to your future business strategy.
6. Check the Licenses and Permits
You may need to apply for state-specific licenses and permits to run your restaurant. Your restaurant must have a liquor license if you sell alcoholic beverages. It is also worth checking if any violations or outstanding debts could jeopardize the restaurant’s success.
Does your restaurant use a dumpster for garbage disposal? You may need a dumpster placement permit. Licenses and permits vary depending on your location, so it is best to check with your local authority before you sign the contract.
Ask the seller about licenses and permits so that you are aware of which ones you need. You can check your local government website to view inspection results and any health code violations against the restaurant before you buy it.
7. Marketing is Crucial
Keeping customers interested in your new restaurant is vital for success. What is the current owner doing to advertise the restaurant? Consider your marketing strategy before you buy so you can figure out how you would cater to the demographic.
Take a look at the restaurant’s social media and website before you commit to the purchase. Do they have a solid online following with plenty of positive reviews? A paper-based marketing strategy may work better if the customer base is an older crowd.
8. Buying a Restaurant is an Adventure
Buying a restaurant is hard work. However, the rewards you’ll receive along the way will make it worthwhile. Running a restaurant is the perfect way to introduce people to your recipes and culture alongside great music and delicious beverages.
Owning a restaurant will also give you more opportunities to give back to your community. You can donate surplus food to charities and homeless shelters or sponsor a worthy cause.
Get Support With Buying a Restaurant
Buying a restaurant is the perfect way to enter the business world without taking substantial financial steps. An existing restaurant with an established customer base, trained staff, and permits will allow you to take over where the previous owner left off. It would be best to research whether the restaurant for sale is a risk or a path to success.
Are you ready to buy a restaurant? Take the first step and book a free consultation with Fusion to make your dream a reality.
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Defending Your Asking Price
When you’re putting your business on the market, one of the top considerations is your asking price. Once you have a fair price established, let’s take a closer look at how business brokers and M&A advisors work with their clients to back up that price with details concerning why it is justified.
Telling the Story
A key aspect of defending your asking price is telling the story of your business. Your brokerage professional will help you go over the details of the story so it is properly conveyed to prospective buyers. Buyers, of course, will want to understand the story behind the business so that they can understand its history and why it is for sale. You will want to feel prepared to interact with prospective buyers and how to discuss details concerning its value.
Your business broker or M&A advisor will put together written materials about your business. These also help buyers gain clarity on the story of your business and its sales message.
Seeing Your Buyer’s Perspective
It goes without saying that a big part of coming up with your decision of the asking price is that you want something that sounds not only reasonable but also attractive to buyers. We recommend trying to view the entire transaction from the buyer’s perspective. The buyer must be able to see how they will successfully own and potentially operate the business, as this is essential for fostering a completed deal.
Another consideration is, how will they pay for the business? In many cases, it can tremendously benefit a transaction to offer assistance in the way of seller financing. Seller financing can speed up the process, as you will not be so reliant waiting for the bank loan process, which can drag out for months.
The Complexities of Your Asking Price
The process of establishing and then justifying your asking price is not always simple. It is a symphony of moving parts, and it’s important to feel educated and involved in the process. Ultimately justifying the asking price is the launching point of the process, but it is also just the beginning of the journey towards the completion of a successful deal.
Copyright: Business Brokerage Press, Inc.
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Common Legal Mistakes That Sellers Make
Nothing strikes fear in the heart of a business owner like a legal mistake. The best way to ensure that you will avoid serious legal issues is to work with a trusted and experienced team. Otherwise, it’s easy to accidentally miss necessary steps.
When you’re selling a business, there are a lot of moving pieces, and that means that there are ample opportunities for things to go wrong. It’s always best to be prepared. When mistakes are made, it can not only mean a significant expenditure of your time, but also your money. These kinds of issues can also bring your sales process to a total halt and perhaps derail your deal completely.
There are more than a few sellers who overlooked the importance of working with an attorney. When you are selling a business, it should come as no surprise that there is a great deal of paperwork. Your attorney will guide you to make sure that all necessary preparations have been made from a legal perspective. When your prospective buyer sees that your legal “ducks are in a row,” he or she will feel more confident in your organization and level of professionalism.
One document that often is skipped is the Letter of Intent (LOI). Sellers assume that things will move along more quickly if they forego this document. Keep in mind that the LOI truly has its place in almost any deal. After all, it not only outlines both parties’ expectations in writing, it also works to protect your best interests. Once projective buyers have signed this document, it proves they are serious about the deal. That means it is not so easy for them to walk away without consequences.
What if your deal falls through completely? Will your buyer then reveal to the public that your business was for sale and even the potential terms that were on the table? This could indeed occur if you were not backed up by an NDA. Don’t skip this very important document either. Your business broker or M&A advisor will be very well acquainted with NDAs and guide you in the best way possible.
Warding off these kinds of issues is one great reason to be equipped with a small team of professionals to turn to for advice. This team should include your business broker or M&A advisor, accountant, and attorney.
Copyright: Business Brokerage Press, Inc.
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