The motive for determining the value of a company can range from buying/selling decisions, raising capital through borrowing, planning strategic mergers and acquisitions, etc.
The following article highlights some of the key business valuation issues and provides tips on how to deal with such issues.
Problem 1: How to choose the right business valuer?
Ask this simple question: “Am I qualified and experienced to evaluate my own business?”
If it’s an unfamiliar area, look for the businessmen listed below who usually offer such services:
1. CPAs provide business valuation services. The knowledge gained from handling various accounting, financial and tax work enables an experienced chartered accountant to acquire knowledge that is well suited for valuing a company
2. Financial professionals/consultants (non-CPA) can also bring their expertise, but their background and experience must be carefully evaluated before they are hired.
3. Business brokers are an obvious choice to value the businesses for sale as they specialize in buying businesses and selling businesses for many years which includes business valuation
4. Commercial real estate agents/agents are good at valuing real estate but lack the skills and experience to properly value intangible assets such as goodwill.
Problem 2: What are the most commonly used business valuation techniques?
There are many methods to determine the value of a business, but the most popular methods used by professional and experienced business brokers are as follows:
The Letter of Opinion is a limited-use assessment intended for small businesses with less than $250,000 in revenue. This evaluation is based on a market comparison with similar companies within an industry.
Value analysis is discretionary cash flow, as most Main Street companies are bought and sold at multiples of annual cash flow.
Formal company valuation:
It includes financial analysis, balance sheet review with supporting documents containing reviews of historical company results and project results.
The Mergers and Acquisitions Valuation is a comprehensive business valuation for transaction purposes and is developed in accordance with the Uniform Standards of Professional Appraisal Practice (USPAP).
IRS Income Decision 59-60:
A USPAP-regulated assessment designed for litigation that focuses on US court judgments, cited court case law, and in-depth analysis and research on minority and merchantability discounts.
Question 3: What preparatory information and documents are required for the company valuation?
Below is a checklist of documents and information that professional management consultants require prior to valuing a business:
This includes balance sheets, income statements, balance sheet changes, statements of shareholders’ equity or ownership interests for the last 5 financial years, list of subsidiaries, list of equipment, depreciation schedule, past receivables or payments, accruals, inventory list, leases (if any), Existing contracts with employees, suppliers, franchise agreements, customer agreements, license agreements, equipment leases or rentals, loan agreements, employment contracts, employee benefit plans, owner compensation plans, applicable insurance, project budgets, if available.
This includes the articles of incorporation (if any), articles of incorporation, any amendments to either, company memorandum, partnerships, articles of incorporation of partnerships (with any amendments) along with a list of existing purchase/sale agreements, options to purchase stock or partnership interests, or rights of first refusal.
Also have company history, change of ownership and/or bona fide offers ready. Also describe the position compared to competitors or other factors that make the company unique, relevant marketing literature such as brochures, advertisements, list of locations where the company operates, details of size and whether it is wholly owned or leased. List of states where the company is licensed to do business, list of current customers, suppliers, major customers. Resumes or list of key personnel with age, position, compensation, seniority, education and previous experience. List of trade association memberships or eligible for membership. List of all patents, copyrights, trademarks and other intangible assets along with correspondence with regulatory bodies for business matters.
Question 4: How is the company valuation carried out?
Applying a proper business valuation process ensures that selling a business will yield a better selling price compared to a random business valuation.
Step 1: The broker meets with the client to determine what type of assessment is required.
Step 2: During the meeting, the broker will help complete the company profile information required for the selected valuation type.
Step 3: Once the company profile is finalized, the information package is sent to an external valuation analyst by post, fax or email.
Step 4: The assessment analyst reviews the documents and begins the assessment.
Step 5: A complete company profile is then created and all questions that arise are answered.
Step 6: The analyst issues a preliminary review of the rating. It assures that all details have been taken into account and allows adjustments to be made in the event of new information or further clarification.
Step 7: Once the verification is done with the business broker, the analyst prepares, prints and mails the final assessment report.
Step 8: The agent receives hard copies and an electronic copy (if requested) of the final report. This report is sent to the seller/owner of the business.
A planned business valuation involves many procedures and systematic planning to ensure the right value is determined to support the sale of businesses.