Most business owners have 40 to 70 percent of their net worth tied to their business, but only have a guess as to the value. Unlike other assets, such as stocks and homes in your neighborhood that were recently sold, there is limited public information available to help you value your business.
Having an independent, third-party appraiser is the easiest way to ascertain the value of your company, and the independent nature of the appraisal is what convinces potential buyers that the appraisal is fair, honest, and transparent. We have relationships with highly respected third-party appraisers.
There are three different levels of valuations —
- Calculation of Value — This is a 15 to 25-page document that is generally used for the business owner’s personal knowledge.
- Modified Appraisal Report — This report is used by third parties such as banks and the SBA for business acquisition financing, and the Internal Revenue Service for gift tax. This report generally ranges from 30 to 45 pages.
- Appraisal Report or Self-Contained Report — This report is generally used if there is a dispute such as in the case of a divorce. The report generally ranges from 60 to 80 pages.
Business Value Is More Than a Calculation
Allen Business Advisors knows from experience that the value of a business is more than a mathematical calculation. Many business owners do not realize that two companies with the exact financial performance in the same industry and the same market can have dramatically different values.
The factors that influence value beyond the numbers are —
- A stable and motivated management team. Sophisticated buyers know that with a solid management team in place, prospects are good for continued business success. Without a strong management team, it may be very difficult to achieve the success of the seller.
- Operating systems that improve the sustainability of cash flows. Operating systems include the computerized and manual procedures used in the business to generate its revenue and control expenses, (i.e. create cash flow), as well as the methods used to track how customers are identified and how products or services are delivered. The establishment and documentation of standard business procedures and systems demonstrate to a buyer that the business can be maintained profitably after the sale.
- A solid, diversified customer base. Buyers typically look for a customer base in which no single client accounts for more than 10 percent of total sales. A diversified customer base helps insulate a company from the loss of any single customer.
- A realistic growth strategy. Buyers tend to pay premium prices for companies with realistic strategies for growth. A written plan describing future growth and how that growth will be achieved based on industry dynamics, increased demand for the company’s products, new product lines, market plans, growth through acquisition, and expansion through augmenting territory, product lines, manufacturing capacity, etc. It is this detailed growth plan, properly communicated, that helps to improve value.
- Effective financial controls. Financial controls are not only a critical element of business management, but they also safeguard a company’s assets. Effective financial controls support the claim that a company is consistently profitable. The best way to document that your company has effective financial controls and that its historical financial statements are correct is through a reputable CPA firm. Higher quality financial statements such as reviewed of audited also make a significant difference.
- Stable and improving cash flow. Ultimately, all Value Drivers contribute to stable and predictable cash flow. It is important that the cash flow is substantial and on an upswing.