Business Appraisals Buffalo New York – What Investors Need To Know

1Most of us have a good idea of what our business is worth based on how successful it is. Often though we’ll oversell our own ideas to ourselves, and this number will turn out to be quite far from the mark. Sometimes it’s necessary to get a proper business valuation. For instance, maybe you’re trying to sell the company and need to know it’s market worth in order to sell. It might be for your taxes, or you may even be litigating. All of these cases mean you need that accurate number.

There are five steps involved in getting a proper valuation:

  • Preparing and Planning
  • Adjusting the Finances
  • Choosing Valuation Methods
  • Applying the Methods
  • Value Conclusion

Step 1: Planning and Preparation

You’ll want to keep yourself as organized as possible, so start by understanding why you need this valuation, and then gather together all the information and data that might be relevant. These valuations will not be a guarantee. They are a representation of approximately what the company is worth.

These things should be kept in mind:

  1. See how the business operates. Is there a tax-efficient structure to it, and can it be improved? Are sales on the rise or on the fall? What size is the demographic of your company?
  2. A business valuation is more than subtracting your liabilities from your assets, as part of the value comes from assets that are intangible.
  3. Carefully choose your appraisal team. It can be exhausting to do this all yourself, which means you’ll be more likely to make errors. You’ll want a good accountant, and then possibly an attorney and broker.

In many cases, company owners want to sell their companies to make extra profit. The sales process can then act like an auction more than anything else, where the highest bidder gets the prize. Your main focus is to find the fair market value, or the amount that a buyer could reasonably be expected to offer.

Sometimes a rival may end up approaching with an offer even though the owner hasn’t stated that they’re currently looking to sell. These companies may be looking for resources to supplement themselves. This is called a synergistic buyer. This is done with the investment standard. They use public information to assume the value of your business.

Sadly, one of the most common reasons is that something has occurred, like bankruptcy or a natural disaster, and the company must liquidize. In these cases the owner is unable to wait for the best offer and must sell as soon as possible.

Now that you know why you need the valuation you can understand what you need to gather to understand the worth of your business. This information may include marketing plans, customer specific information, staff records, financial statements, and operation procedures. A few of these may give you a good range to work with, however if you want a more specific number then you best be prepared to do some calculating.

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Step 2: Financial Adjustments

The process will need the company financial information. You’re going to need your balance sheets, which show the relationship between the owner’s equity, assets, and liabilities, and then the income statements, which are reports that show all the profitable operations from the past or the present. An accurate valuation requires at least three years worth of these statements.

Knowing that the owners have a copious amount of discretion available to them when it comes to making decisions and recognize what is an asset, income, and expense, the statements may require readjusting or recasting. So it’s important to construct the relationship between business assets, expenses and income that these assets are capable of producing. These will require recasting in order to generate inputs for use in business valuation.

Step 3: Deciding on a Valuation Method

Once you have that data ready to go, you can now choose the procedures that now follow. There are several acceptable methods, and you should use as many as you’re able to ensure you can have an accurate number, and that you haven’t made a costly mistake in your calculations or lists in any one particular method. If they all come back with similar results, then you can assume that you have an accurate valuation.

Here are the more popular methods:

The Asset Valuation Method

You’ll use this method to determine the value of your business’ current assets. While this method can be quite valuable, it likely won’t give you enough information for a truly accurate value, especially if your business is small. If they don’t produce any income for you then whatever assets you have don’t mean much. On the opposite side of the spectrum, a company can be generating a lot of profit but own few assets. This method is best suited to larger companies, as it’s not always the best at showing you your business operations.

A few of the documents you’ll want to include in this are:

  • All products and services that are a part of your intellectual property.
  • Important distribution and customer contracts.
  • Your different partnership agreements.

Typical unrecorded liabilities that are included in the valuation are:

  • Upcoming legal judgements.
  • The company’s obligations with regards to income and property tax.
  • {Environmental compliance costs.|The cost of complying with environmental standards.|Your costs for environmental standard compliance.

The Liquidation Value Method

Without considering the reputation of the business or owners, this method strives to tell you what the company would be worth if it was sold on an open market. It takes into account the physical assets, things like equipment, inventory, and real estate.

Comparable Company Analysis

The Comparable Company valuation technique is generally the easiest to perform. You will have to have publicly traded securities, so that the company’s value can be compared against that of other companies more easily.

This is best used for small additions are being done or considered, ones that don’t change the control of the company. This does not help when the added value comes from a change in the main person in charge. This is the most popular method, so long as no power change is happening.

Discounted Cash Flow Analysis

DCF (discounted cash flow analysis) is used to ascertain the amount of money the company will generate in the future, and base the value off of that. In this respect, DCF is the most theoretically correct of all of the valuation methods.

There are still a few problems that get in the way of this method. What DCFs can offer are estimates based on theory and computation, but they can also lose out in accuracy of the exact value of the company. Simply because you are looking at future money it’s become a difficult method to work with. By attempting to make predictions your numbers are going to be based off of assumptions and speculations, and they’ll become less accurate the further in the future you go. Any number of assumptions made in a DCF valuation can swing the value of the company√≥sometimes quite significantly. Something like an established utility company, a company that’s reliable and has an extremely stable and predictable income, are the best to use with this method.

Precedent Transaction Analysis

Another fairly easy valuation method to perform. This is for companies that have made an acquisition, perhaps a share price, and will need the number of shares acquired as well as the amount of debt that’s been assumed. You should assume this is the company that was acquired had previous publically traded instruments.

A Precedent Transaction is used to ascertain the difference in value of comparable companies that were acquired before and after the transaction (market value before vs. amount paid for the company in a purchase where control is changed). This difference represents the premium paid to acquire the controlling interest in the business. Precedent Transaction analysis should typically be one of the valuation methods used in the realm of acquisitioning other companies.

Leveraged Buyout Analysis

A leveraged buyout (LBO) is the acquisition of a public or private company with a significant amount of borrowed funds. Often LBOs are used for flipping companies, that is the idea of buying one cheap and selling it at a profit in a few years. These are usually conducted by private equity firms that are attempting to maximize returns from these investments by using as much borrowed capital as possible (otherwise known as debt financing) to fund the acquisition of a company. There are three ways to do an LBO analysis:

  1. Assume a minimum return for a sponsor as well as a reasonable equity/debt ratio, and use this to impute a company value.
  1. Assume a minimum return required for the sponsor, as well as an appropriate value of the company, use this to impute the needed equity/debt ratio.
  1. Assume an appropriate debt/equity ratio and company value, and from this compute the investment’s expected return.

Step 4: How to Apply the Methods

Now that you’ve assembled the data you can finally calculate your company’s value. As mentioned before, it’s highly recommended that you utilize more than one of these methods, as there is no “one size fits all” when it comes to properly valuing your company. Along with that, cross-checking between these different methods can verify the accuracy of how much the company is actually worth by minimizing the chances of repeating numerical and budget errors. It may mean a lot more homework for you, but you’ll have a more accurate valuation.

Step 5: Value Conclusion

With the results from the selected valuation methods available, you can make the decision of what the business is worth. This is known as the business value synthesis. No single method can provide a perfect, accurate number, so you might consider using a few methods and comparing the results to form your opinion. At the end of all this research, the value of a company will always be somewhat subjective. Remember that you’ll often place a higher value on your company when others may be more than happy to tear it apart. However, since the various business valuation methods you have chosen may produce somewhat different results, concluding the business value requires that these differences be reconciled. By looking into your earnings, assets, projected growth, and the other financial factors you’ll be able to find a figure similar to the numbers you’re providing. The rest comes down to the art of the deal.