Tina: I am ready to sell my business. How do I know how much my business is worth?
Dan: First, I would suggest if you are ready to sell your business you should already know what your business is worth. Selling a business is a big undertaking which is often the culmination of your life’s work. Waiting until you are on the cusp of a sale is not the right time to start wondering about value. To fully maximize the value of your investment in a company, consider a valuation three to five years in advance of selling.
Tina: I have an idea of the amount I want to sell my business for. I also know the potential buyer will have my business appraised. Do I need to have my business appraised before I sell it? Can I rely on the buyer’s appraisal to see if my price is too high? What advice do you have?
Dan: This depends on your comfort level with the nuances regarding valuation. Have you sold a number of businesses in the past? Do you have a solid understanding of what drives value? Have you undertaken a process to improve value pre-sale? If so, you may not need a valuation.
Likewise, if you have an M & A advisor working on your behalf who can help you throughout the process.
If this is your first sale, if you are un-advised, or if you are less comfortable with the nuances of valuation, undertaking your own independent valuation is a good idea. An investment in a certified valuation can potentially keep you from a very costly mistake, which will be all but impossible to rectify.
If this is your first sale, if you are un-advised, or if you are less comfortable with the nuances of valuation, undertaking your own independent valuation is a good idea.
Tina: Why would I need my business valued for non-legal purposes, other than general exit planning and to sell my business?
Dan: You would need it valued for a myriad of reasons. The most typical of those include:
As part of a buy-sell agreement (bringing in a partner, exiting a partner, etc.)
Litigation (to include damages, lost profits, etc.)
Divorce (i.e. the business is a marital asset)
409(a) compliance (you have issues stock options or equity compensation and triggered a valuation requirement under IRS rule 409
Tina: Is there a difference between an “appraisal” and a “valuation?”
Dan: There is not much difference between an appraisal and a valuation. Both are opinions of value. People more frequently refer to appraisals in the context of real estate. However the terms business appraisal and business valuation can be used interchangeably.
Tina: Do you need to visit my business to complete the appraisal? What information will you need from me to complete the appraisal?
Dan: Most often we can complete an appraisal remotely with minimal interference to the day-to-day performance of the business. This is especially so for service businesses where value is driven by people and processes rather than by productive physical assets. Modern technology helps us all work remotely. We typically will only work onsite if there is a compelling reason to do so.
The basic appraisal process remains the same whether you have a distribution business in Des Moines or an online business working across the globe.
Tina: Can you appraise my online business if I have clients located all over the world, or if there is an international component to my business?
Dan: We can appraise your online business as well as any international components of the business. Online businesses are unique, but we deal with them quite frequently. The basic appraisal process remains the same whether you have a distribution business in Des Moines or an online business working across the globe.
Tina: Is it ethical for an appraiser to help me sell my business?
Dan: This is a gray area. We do not work that way. We view ourselves as independent and unbiased, separating ourselves from a sale. I am certain many appraisers can be unbiased and sell a company, but it is not the way we prefer to work.
Tina: I have a twenty-year-old corporation with a strong D&B rating. Is it worth any money?
Dan: Sure, a strong D & B rating may be worth money. However, we cannot really answer that based solely on a D&B rating.
In the absence of an affirmative requirement in a shareholder or operating agreement, it is unlikely you would be obligated to share your valuation.
Tina: I want to find out what my partnership in a business is worth. Do I have to show my partners the appraisal?
Dan: You likely do not need to show your partners the appraisal. In the absence of an affirmative requirement in a shareholder or operating agreement, it is unlikely you would be obligated to share your valuation. In our practice, we often work on behalf of one party in a shareholder breakup without ever speaking to the other side.
Tina: How long is my appraisal "up-to-date" or “current?”
Dan: We generally say about one year. This is also consistent with the American Society of Appraisers (ASA) guidance. An appraisal is a snapshot in time, so any material changes to the condition or performance of the business will change the value indicated. If you have had an appraisal completed and want to know if it is still valid, consult with your valuation firm.
Tina: How can I get a premium value for my business?
Dan: First, plan for an exit. This is a multi-year process, wherein if you identify and mitigate risks you can push your relative valuation higher. Other specific items which drive premium valuations include recurring revenue streams, defensible market niche, broad customer base, and lack of reliance on the shareholder for the performance of the business.
Tina: Do you have any other tips or advice for anyone buying, selling or appraising a business?
Dan: It is probably apparent from the above, but we are big believers in starting early and being diligent in your preparations. While the cost of a valuation is not insignificant, there is an incredible return on investment (ROI) in establishing value early and then putting together a concrete, definable plan to achieve your desired exit value. Consider it this way: a company which proactively plans an exit may spend 10-20-30 thousand dollars in preparation. They often see hundreds of thousands of dollars in increased sale proceeds. Can you get a ROI of $10,000 to $20,000 in the stock market? We do not think so.