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Common Questions regarding Business Valuation

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What is the process to complete a business valuation?

Valuing a privately held business is not an exact science. To do it accurately requires experience and the ability to examine all the risk factors and value drivers involved.

A business valuation typically takes three to five weeks to complete, depending on the size and scope of the assignment. Every business valuation starts by obtaining necessary financial and legal documents, which the appraiser analyzes for trends and areas requiring further discussion.

Once this is completed, the appraiser typically conducts an interview with the business owner and/or management team in order to gain a better understanding of the company, its business model and any issues surrounding the historical and prospective financial performance.

Next, the appraiser utilizes this information to begin the process of developing a written valuation report which thoroughly documents the valuation methodologies and related analysis used to form the appraiser’s final opinion of value.

How can a business owner profit from having their business valued?

This will depend on the reason or purpose for a business valuation. Maybe there is a need to settle a dispute? Perhaps just curious or looking for peace of mind – am I building value in my Company? Or, maybe you are thinking about selling at some point in the future and want to know how you can maximize the value of the Company.

Understanding the Company’s value drivers and risk factors can help an owner concentrate on areas where they can add extra value. Oftentimes, we identify issues or concerns that can be amended or improved upon which can make major differences to the overall value of the company.

The key is to reduce risk. By reducing risk, you will increase value.

What makes a business (more) valuable?

A Company’s historical financial performance often speaks in terms of how a business has performed in the past and may or may not continue to perform in the future. There are a number of other factors that are examined in determining value – these include internal and external influences.

External influences may include: the economic climate; market conditions within the business’ industry; competition; regulations and threat of litigation.

Internal influences (aside from financial) may include: location; quality of systems in place; customer relationships; qualifications of management; employees’ tenure; along with the products and services offered, to name of few.

Obviously, reducing risks in any of the aforementioned areas, likely increases value.

Can a “ballpark” estimate of value be determined just by looking at the numbers?

Perhaps, but that is akin to a residential real estate appraiser driving by a house to determines its value, rather than looking inside. Two identical and adjacent homes could have materially different values if one is in relatively poor condition on the inside and the other has undergone several renovations and additions that are not visible from the street.

The business valuation process is far more sensitive and complex than just plugging numbers into a computer software package or spreadsheet.

The financial figures (for example, the pre-tax profits) may need to be adjusted for certain factors such as excess compensation, fair market rent, etc. The numbers may not necessarily reflect certain risks that would need to be factored, when valuing a business (for example, dependence on a key person or customer concentration).

How much does a business appraisal cost?

Most appraisers quote a range of fees or cite a straight hourly rate. It is a direct violation of ethics and professional standards to be paid on a contingency basis or outcome of the valuation. Most appraisers will give consideration to the time they will spend on an engagement. To properly value a business, the appraiser must do an extensive qualitative, as well as, quantitative assessment of the business’ risk factors and value drivers.

How can American Business Appraisers Help?

Business valuations require a significant amount of careful consideration and judgment. Our experienced staff recognizes and quantifies a business’ risk factors and value drivers. The more risk factors a business has, value is driven downward. On the other hand, identifying value drivers will increase the value of a business.  Call us to discuss any specific valuation needs. Every individual situation is different and not everyone requires our certified appraisal services and sometimes just talking with one of our appraisers is all that may be necessary. With our initial consultation, there is no cost or obligation to you. We promise you two things; first, to invest a reasonable amount of time to gain an understanding of your specific requirements, and second, our communication will be kept confidential.

 

 

This publication is designed to provide accurate and authoritative information with regard to the subject matter covered. It is sent to you with the understanding that American Business Appraisers are not engaged in rendering legal or accounting advice. The services of an attorney or accountant should be sought in connection with any legal or tax matters covered.

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