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Returning Value Blog

What's Your Small Business Worth?

Posted by Michael D. Machen, CPA, CVA on Aug 9, 2016 9:26:48 AM

iStock_87186341_LARGE-425230-edited.jpgHow to value business interests

It is often difficult to put a price tag on a company that is not publicly traded. For instance, the value of a family-owned business will typically exceed the total value of the hard assets such as equipment and inventory. In addition, assigning a value to intangible assets such as goodwill is a difficult proposition at best.

Frequently, it makes sense to have a business appraisal prepared by a qualified professional. This is especially true if you intend to sell it in the near future.

Background: There are several ways a qualified appraiser can value the key aspects of a business to arrive at a final figure. As part of the process, the appraiser will provide a valuation report, explaining in detail the specific methodology used for the valuation. This will be invaluable when the buyer conducts its own due diligence. The chances of consummating the deal will increase if the buyer knows he or she is dealing with a professional.

However, this is not the be-all and end-all. The appraisal should be viewed as just the starting point for negotiations. For instance, one buyer may have strong reasons for acquiring your company and could be willing to pay more than the amounts offered by other interested parties. Conversely, another buyer might be looking to merely enhance an existing operation and may not be willing to pay for the company’s going-concern value. It’s important to analyze the reasons behind the sale before you establish a price.

Some of the key aspects that should be considered in this process are:

  • Both the primary and secondary factors that influence buyers;
  • The different ways to add value before the sale occurs;
  • The necessary adjustments to financial statements (especially those that portray your company in a favorable light); and
  • The methods and formulas used to put a price tag on a business.

Note: Other adjustments may be required if you are planning to sell only part of the business. Of course, your plans may change.

After the professional appraiser has established an approximate value for the business, you must use your negotiating skills to come to an agreement. Depending on the situation, you may be able to realize the full value of the business, or you might be willing to accept a slightly lower price if you are looking to sell quickly. Obtain guidance from your business broker concerning the going rate for a business such as yours. In some cases, a professional may help you negotiate the best deal.

Another option is to not set a listing price at all. Instead, you might contact potential buyers and provide them with the necessary information about your business. Then you can solicit bids from this select group and accept the highest bid. This process may help you realize a competitive price for your business in a relatively short period of time.

Best approach: Use a professional adviser every step of the way. This can help ensure that you have established a reasonable and accurate value for your business in today’s marketplace. Alternatively, you may determine that it is not a good time to sell the business, but now you will have a better idea of its true worth.

For more information about the above article or other business valuation services , please contact Michael D. Machen, CPA, CVA at (334) 887-7022 or please feel free to leave us a message below.

Topics: Business Valuation

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