At VR Business Brokers of Fort Worth/Arlington one of the key services that we offer to business owners is professional valuation services. By evaluating the value of your business through our in-house methodologies or by working with an experienced, independent, professional business appraisal firm, we provide you with an objective and expert opinion of your company’s value … delivered in a responsible, timely and efficient manner. As a business owner, you may want to obtain a value for your business for reasons other than the potential sale of the company. For example, you may want to properly plan for your family and/or business to ensure your own peace of mind.
Business Evaluation Methodologies
The type of valuation that you need for your individual business depends on your its size and the reason for the valuation. VR Business Brokers of Fort Worth/Arlington handles four types of business evaluations to meet owners’ different needs. We perform the first three methodologies in house, using such resources as our proprietary database of business transactions. These evaluations are typically done for transactions that are under $1 million in value. The fourth type of valuation, typically used when a transaction exceeds $1 million, is done by an independent, third-party, professional appraiser. Working with you, we will use one of these four methodologies to assess the value of your business:
· Market Analysis Opinion of Value – One of the evaluation methodologies that VR uses in house, this quick reference evaluation is based on historical sold transactions of small businesses similar to yours. The market analysis opinion of value is for owners who need a general value range in a short timeframe. This type of evaluation is done for small "Main Street" businesses.
· Value Analysis – Performed in house by VR Business Brokers of Fort Worth/Arlington this valuation provides a snapshot of the business, determining its "fair market value." Used primarily for “Main Street” businesses, the value analysis requires three years of general financial information, research and knowledge of other marketplace issues. The value analysis is for owners who require more than a general range of their companies’ value, as the market analysis opinion of value offers.
· Formal Evaluation – A formal evaluation is an in-depth process used for most purchase and sale transactions and SBA financing. At VR Business Brokers of Fort Worth/Arlington we also perform this evaluation in house. The formal evaluation requires three years of general financial information and much more information about the company's business history, products, services and market conditions.
· IRS 59-60 Valuation – This valuation, performed by a third-party professional appraisor, is used for gift and estate planning, Employee Stock Option Plans (ESOPs), mergers and acquisitions of large, privately held companies known as "Middle Market Companies." The IRS 59-60 valuation requires all the information of a formal valuation plus other documentation. In addition to being done for transactions in excess of $1 million, this valuation may be required to satisfy a financial or legal obligation. VR’s third-party independent appraisers prepare the formal valuation and the IRS 59-60 valuation in accordance with the Uniform Standards of Professional Appraisal Practice (USPAP) and the American Society of Appraiser (ASA). The independent appraisal firm with which we partner is a member of the Institute of Business Appraisers (IBA) and holds the title of Certified Business Appraiser (CBA).
Setting the Price for Your Business
Once the business evaluation is complete, we will use one of four approaches to set the sales price for your company. These approaches include:
Market Approach – To value your business, this approach utilizes information from similar companies that have sold in recent years.
Asset Approach - This approach values your company by summing the value of its individual assets. The asset approach considers going concern value (goodwill value) and the liquidation of individual assets value.
Income Approach – In this approach, we value your business by calculating the present value of its projected income or cash flow. The income approach valuation is based on either of the following methodologies:
· Capitalized future returns, also known as a single period capitalization
· Discounted future returns or multiple period discounting
Excess Earnings Method - This valuation method is a hybrid method utilizing the concepts from both the asset approach and income approach. The excess earnings method was developed to estimate goodwill, which is the fair market value of the going concern. Appraisers often use this method to value “Main Street” and “Upper Main Street” values. With the excess earnings method, the company’s net tangible assets and the goodwill present in the business are determined separately. Once these two separate values are analyzed, they are added together to determine the value of the company.
In addition, formula valuations have been developed by observing marketplace transactions in industries with a significant number of historical transactions. These observations may reflect a common “multiplier” for that industry, which the appraiser can apply to cash flow or revenue amounts. One caveat about formula valuations, however. They are simple to use and can be helpful to you in developing a price range but not a specific price for your company.
How You Can Enhance the Value of Your Business
The most important way you can enhance your company’s value prior to a sale is to know its worth. Secure a third-party independent business valuation to attain the highest potential price for your company. The financial institution that is providing the buyer’s financing will require an independent business appraisal. It is not to your advantage to allow the purchaser to be the only party setting the price with his or her own appraisal. You also don’t want to learn too late that you sold the business for less than its genuine worth.
Many of the better prospective buyers for your company may live in other states or even other countries. In this age of globalization, it would be a mistake for you, as the owner, to ignore other economic markets, especially if to use them would be to your advantage. Consequently, you need to use an appraisal firm who has national experience to take advantage of higher pricing policies supported by areas with different economies. You want to work with a credible appraiser with extensive experience in all types of businesses and enough data to support his/her decisions. This type of appraiser will lend credibility to your relationship with prospective buyers.
For the appraisal to be credible and substantial to other parties to the transaction, your appraiser should be a totally independent third party who has no other business relations with you at all. Whenever you are involved in a business transaction, you should at least consider the possibility that your decisions and actions may be challenged in a court of law. Therefore, you should only choose an appraiser who would best support you in such an extreme occurrence. Before you choose an appraiser, ask the following questions:
· How many business appraisals did you do in the last year?
- What percentage of your time is spent in business appraising (as opposed to residential appraisals)?
- What business appraisal designations/certifications do you have?
- What is required to retain these designations/certifications?
- How many methodologies did you use and what alternative methods did you consider?
- What articles and books have you written on the subject of business appraisals?
- Have you worked for this client before and in what capacity?
- By what professional practice do you claim this to be unbiased?
- Have you followed the departure provisions or does your report meet the standards as set by the Appraisal Foundation, as required by law under the Uniform Standards of Professional Appraisal Practice (USPAP)?
You don’t necessarily have to pay more to get the best. Because of our extensive experience and industry reputation, VR Business Brokers of Fort Worth/Arlington can help you secure the services of superior appraisers and if necessary, accountants and attorneys at appropriate fees. What ultimately costs you more is to not use the best from the beginning. The advice of these professionals will be instrumental to you selling your business to the right buyer at the right price.