The high price of an extremely detailed valuation can be daunting for owners looking to sell their business. As the experts will tell you, a scaled-down business valuation is sufficient for owners just entering the sales process, and it costs a fraction of the price.
The more detailed a business valuation, the more expensive it will be. With the most in-depth certified appraisals costing as much as $25,000, it’s no wonder that most owners shy away.
However, discovering your company’s true value is a crucial component for any business owner ready to sell. That’s why I turned to two experts to get the low-down on soliciting a valuation that fits within your budget.
Terri Krivosha is a strategic business attorney from Maslon, LLP, who specializes in helping entrepreneurial and dynamic businesses grow and develop. Darren Mize is an Accredited Senior Appraiser with GCF Valuation, Inc.
Together, they shed some light on why many owners - especially those just entering the sales process - needn’t order more than a basic appraisal.
Why a Basic Valuation may be all you Need
It’s no secret, says Terri. The primary consideration for buyers is the amount of money they stand to make off your company. To deliver this information, you need to show them the numbers.
What many owners don’t realize, however, is that a valuation is only one piece of the puzzle. According to Terri, these other three reports can also deliver a bulk of the financial information that buyers want to see.
* Historical statements - Collect your business’s historical statements to paint an accurate portrait of your financial history.
* Five-year projection - Your company’s future is what matters most to prospective buyers. That’s why most, if not all, will request a five-year projection of your business’s financial outlook.
A strategic financial expert can help you create this projection. They’ll draw on your historical numbers and allocate risk to formulate an accurate projection.
* Adjusted income statement - You must be able to show your revenue and expenses through operating and nonoperating activities. This will give your buyers an idea of the expenses they’ll incur after you depart.
For instance, some owners are very rich with employee benefits. If you’re trying to entice a buyer, you may want to scale back these benefits to minimize the new owner’s expenses.
Once you’ve presented a buyer with these reports, they may still want to see a valuation. However, Terri warns against paying too much for, well, too much.
“With all the information provided from your other reports, spending a fortune on a valuation is usually unnecessary,” said Terri. “Anything more than an affordable, basic valuation is overkill.”
What a Basic Valuation Includes
Business owners often use one of two valuations to help sell their business: A more basic valuation (Calculation of Value) or an extensive one (Complete Summary Appraisal). While we’re only going to discuss the Calculation of Value in detail, you can read information on both appraisals in this blog post.
A Calculation of Value is a less formal valuation summary for an owner who is considering selling their business.
While this report doesn’t necessarily follow every uniform standard or provide the same level of detail as a more in-depth valuation, Darren says it can give you a solid sense of your business’s value - often at a significantly reduced rate. Here’s what it includes:
* Financial analysis - This section identifies trends based on your historical financial performance, adjusted income statements, profitability and financial risk.
This helps the appraiser compare your business financially with its competition. It also determines your business’s financial risk and cash flow, two of the key factors in measuring your company’s worth.
* Operational analysis - This segment assesses risk based on the operational factors of your business, including the kind of market you serve, your business’s reliance on you (the owner), and your staff structure. Combined, the operational analysis and the financial analysis help determine the bulk of your business’s total risk.
* Market, industrial and economical analysis - This section focuses on economic and industrial trends relating to your business. When gathering this information, appraisers must rely solely on published sources, such as IBISWorld.com, Robert Morris & Associates, Federal Reserve, etc. Unfortunately, this data is limited and often dated.
* Summary of valuation methods applied - This section simply summarizes the various methods used to conduct your valuation. This summary will be much more brief in a Calculation of Value than it would be in a more in-depth report.
Because a Calculation of Value doesn’t provide the depth of some other valuations, Darren says it’s ideal for owners who are just beginning the sales process. For instance, this basic appraisal can help an owner gauge the marketplace as well as reveal areas that require improvement before officially putting their business on the market.
However, in certain scenarios, an owner may require a more in-depth valuation that follows the uniform standards of professional appraisal practices. This is true for owners of larger businesses (earns more than a million dollars per year), and for those engaging with multiple intended users, like a board or a partner.
Still, at the end of the day, Darren says that both valuations should determine similar values for your business. This is why, especially if you’re just entering the sales process, beginning with a more affordable, basic valuation is a smart way to discover the true value of your business.