A proper business valuation is key to a business sale.
If you’re a business administrator or owner who’s received a buyout offer, or you’re getting ready to put your business up for sale, you need to know what your business is worth on the open market. Having a business valuation performed is one of the most important things an owner can do, especially before selling a business.
Why Does Business Valuation Make Sense?
A professionally prepared business valuation will validate and benchmark the value of the company, which offers distinct advantages to the owner. Because it’s based on a wide number of factors, such as economic outlook, industry trends and future earnings potential, a business valuation offers a much more accurate picture of what a business is worth than internal financial statements alone.
Without such well-organized documentation, a business seller could end up conceding more to the buyer than is necessary.
With a business valuation in hand, you’ll be better prepared to begin negotiations with potential buyers on all terms of the sale: from the sales price to financing. However, a valuation is only as good as the information on which it’s based, and the skill of the person appraising that information. That’s why it makes sense to hire a staff CPA with training in business valuation and appraisal. That is, if you want to hire a staff accountant or hire one on contract. Today more so than in the past, it has become common practice for business owners to utilize interactive CPA courses online to better help them understand some of the financial complexities involved in the valuation itself.
Insights Provided by a Business Valuation
A business valuation report will identify the company’s strengths, as well as areas that can be improved. It will provide valuable information on competitors in the industry and compare your business to theirs.
These insights will allow you to make improvements prior to the sale – which can boost the company’s value, as well as its selling price. The areas of your business that can be improved prior to the sale include:
• Hiring more skilled employees or getting rid of “dead weight.”
• Improving your customer base by increasing marketing efforts.
• Diversifying your vendors and customers to avoid over-dependency on one or two.
• Improving documentation, or updating manuals, procedures and operations processes.
• Selling or disposing of unproductive assets or obsolete inventory.
The business valuation will allow you to look at every aspect of your business from a buyer’s prospective. In addition, the insights provided by the business valuation can offer a strategic advantage over the buyer, which can benefit you in terms of price and other contract terms. Plus, in most cases, this legitimate business expense can be written off your taxes (be sure to verify this with your CPA).
How to Make Sure Your Business Valuation is Done Right
Now that you know why it makes sense to have a business valuation before selling your business, it’s important to perform due diligence on the appraisal firm. Why? To make sure it’s going to be done correctly. Here are a few tips on what to look for:
• Will it be performed by an experienced business valuation expert, such as a CPA who has been accredited or certified by a national accrediting organization? Look for credentials such as Accredited in Business Valuation (ABV) or Certified Valuation Analyst (CVA).
• Before you choose an appraisal firm, find out what types of valuations they’ve done, what their strengths are and what companies they have experience with.
• Ask if the company belongs to an industry trade group with a code of ethics.
• Find out if the firm specializes in business valuations for privately held and family businesses.
• Does the CPA firm and valuation adhere to the provisions of the American Institute of Certified Pubic Accountants’ (AICPA) Statement on Standards for Valuation Services (SSVS), which promotes greater transparency and provides a set of guidelines for valuation services?
• Will the valuation adequately examine and discuss all common valuation methods?
• Is the fee comparable to valuations of similar-sized businesses?
• Is it based on data from privately owned businesses, and on actual business results?
Above all, ensure that the CPA you’ve hired for this important task is objective, experienced and qualified.
Not only will a professional business valuation assist a business owner in determining the value of his or her business prior to putting it up for sale, but it can also provide strategic benefits and opportunities to increase value. With so much riding on the valuation, it only makes sense to make sure it’s done right, and use the information to your best advantage.
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