Why Do I Need A Business Evaluation To Sell My Company?

Long before starting the process of selling a business, at the earliest stage an Owner should add to their sale advisor team a trusted business advisor who specializes in business value consulting. Their job is to help Owners calculate the value of a company and determine market value of a company The duration for selling a business varies based on factors like business valuation, market conditions, and industry dynamics.

A business evaluation, also known as a business valuation, is an important step when selling a company for several reasons:

• Determining the Fair Market Value: A business evaluation helps determine the fair market value of a company. It provides an objective assessment of your business's worth based on various factors such as financial performance, assets, liabilities, market conditions, and industry trends. Knowing the fair market value helps you set a realistic asking price and negotiate effectively during the sale process.
• Attracting Potential Buyers: Buyers are more likely to be interested in acquiring a business that has been professionally evaluated. A comprehensive business evaluation report provides potential buyers with a clear understanding of the company's financial health, growth potential, and other relevant details. It enhances your credibility and attracts serious buyers who are willing to pay them a fair price. Determining whether to sell your business involves evaluating factors like market conditions, personal goals, and business valuation.
• Supporting Negotiations: During negotiations, having a business evaluation can provide you with a strong position. It serves as a basis for justifying your asking price and allows you to present solid evidence to support your valuation. It helps in countering unrealistic buyer expectations and facilitates a more productive negotiation process.
  
• Identifying Value Drivers and Weaknesses: A business evaluation can help identify the key value drivers and weaknesses of your company. By assessing various aspects of your business, such as financial statements, customer base, intellectual property, management team, and market position, the evaluation reveals the strengths that make your business attractive to buyers and the weaknesses that need to be addressed or mitigated. When considering selling your business to a competitor, understanding the fair market value and negotiating favorable terms is crucial.
  
• Minimizing Disputes: Selling a business can be a complex process, and disputes may arise between Buyers and Sellers regarding the value of the company. Selling your business successfully, you can employ strategies such as marketing, networking, and engaging with potential buyers through various channels.)  Having a professional business evaluation conducted by a third-party expert adds credibility and reduces the likelihood of disagreements. It provides an unbiased assessment that both parties can rely on, minimizing the potential for conflicts and legal issues.
  
• Tax and Legal Compliance: A business evaluation is often required for tax and legal purposes. It helps determine the tax implications of the sale, such as capital gains tax, and ensures compliance with relevant regulations and reporting requirements. Additionally, having a comprehensive evaluation can provide a clear picture of your company's financial health and aid in meeting disclosure obligations to potential buyers.
  

In summary, a business evaluation is crucial when selling a company as it helps determine the fair market value of a company, attracts buyers, supports negotiations, identifies value drivers and weaknesses, minimizes disputes, and ensures tax and legal compliance. Determining the right time to sell your business involves assessing personal readiness, market conditions, and the business's growth potential It provides a solid foundation for a successful and well-informed process of selling a business.

What Is Valuation?

Valuation is an analytical process to determine the current or projected worth of a group of assets or a company. There are many techniques used for doing a valuation. An analyst placing a value on a company looks at the business's management, the composition of its capital structure, the prospect of future earnings, and the market value of its assets, among other metrics.

In general, a company can be valued on its own on an absolute basis, or on a relative basis compared to other similar companies or assets.

Valuations can be impacted quickly and sometimes unexpectedly by corporate earnings or economic events that require analysts to rework their valuation models and conclusions. We've all experienced unexpected events with our businesses.

Methods Of Valuation

There are various ways to do a Valuation.

• The Discounted Cash Flow Analysis calculates the value of a business or asset based on its earnings potential. Other methods include looking at past and similar transactions of company or asset purchases, or comparing a company with similar businesses and their valuations.
• The Comparable Company Analysis looks at similar companies, in size and industry, and how they trade to determine a fair value for a company or asset.
• The Past Transaction method looks at past transactions of similar companies to determine an appropriate value.
  
• The Asset-Based valuation method, which adds up all the company's asset values, assuming they were sold at fair market value, to get the intrinsic value.
  

Sometimes utilizing all of these and then weighing each is appropriate to calculate intrinsic value. Meanwhile, some methods are more appropriate for certain industries and not others. For example, you wouldn't use an asset-based valuation approach to value a consulting company that has few assets; instead, an earnings-based approach like the Discounted Cash Flow would be more appropriate.

Valuation Limitations

It's easy to become overwhelmed by the number of valuation choices when faced with deciding which valuation method to use to value your company. There are valuation methods that are fairly straightforward while others are more involved and complicated. This is where the Business Valuation Advisor will help.

Unfortunately, there's no one method that's best suited for every situation. Each business is different, and each industry or sector has unique characteristics that may require multiple valuation methods. At the same time, different valuation methods will produce different values for the same underlying asset or company which may lead analysts to employ the technique that provides the most favorable output.

Be honest with yourself. The Buyer will look at your company from all angles.

The Role Of A Business Valuation Advisor

At a high level the role encompasses 3 areas:

• Measurement Of Value: An accredited professional Business Valuation Advisor will work with your team to uncover what you don’t know. A Valuation Analysis will provide you with a different perspective than what you get from Accounting, Audit, and Tax. BVAs use financial information but tend to dig deeper. A financial advisor business coach offers expertise in business valuation, financial planning, and market insights to guide business owners through the selling process. A BVA is uniquely trained to uncover risks, find hidden value and enable wise, valuation-based business decisions. They will help you to understand how each key business element can impact the value of your business.
• Creation Of Value: BVAs work with you and your Management Team to create shareholder value, a key objective of any company. BVAs bring a unique insight to define the value drivers that will bring the most profitable opportunities for growth to your business. They can unlock intangible assets not on the balance sheet of the business – assets that will drive value, such as customer relationships, community relations, management capabilities, and alliances.
  
• Protection Of Value: BVAs understand the many business risks you face. They also understand any actions required to safeguard your business value. This not only protects the value already created, but allows for a long-term perspective on future goals to mitigate risk and maintain value. BVAs know what business leadership is all about. They understand the ups and downs of the market. A BVA can protect your business with a constructive plan driven from valuation insight.

An accredited Business Valuation Advisor is an important and trusted resource for your important business selling decisions.

The Business Valuation Advisor

The role of a BVA is to determine the economic value of a business or a company. They provide an objective assessment of the worth of a business, taking into consideration various factors such as its financial performance, market conditions, industry trends, and other relevant factors. Business value consulting provides expert analysis and recommendations to enhance the value of a company through strategic initiatives and effective operations.

Here are some key responsibilities and activities of a BVA:

• Conducting Valuations: Business valuation professionals perform detailed analyses of a company's financial statements, historical performance, industry benchmarks, and market conditions to assess its value accurately. They use various valuation approaches, such as the income approach, market approach, and asset-based approach, depending on the nature of the business and the purpose of the valuation. 
• Gathering information: They collect and analyze relevant data about the business, including financial statements, tax returns, market research, industry reports, and comparable company data. They calculate the value of a company requires considering financial performance, market conditions, industry benchmarks, and potential synergies with buyers. They also conduct interviews with management, owners, and other stakeholders to gain insights into the business operations, strategies, and future prospects.
• Financial Modeling and Analysis: Valuation professionals use financial modeling techniques to forecast future cash flows, assess risk factors, and determine the appropriate discount rates or capitalization rates. They apply quantitative methods and statistical analysis to arrive at an accurate valuation estimate.
  
• Writing Valuation Reports: Based on their analysis and findings, valuation professionals prepare comprehensive reports that document their methodology, assumptions, and conclusions. These reports are often used by clients for various purposes, including mergers and acquisitions, financial reporting, tax planning, litigation support, and strategic decision-making.
  
• Communication and Client Interaction: Valuation professionals work closely with clients to understand their specific needs and objectives. They explain complex valuation concepts in a clear and concise manner, ensuring that clients are well-informed about the factors influencing the value of their business. They may also provide expert testimony and support in legal proceedings, if required.
  
• Staying Updated with Industry Standards: Business valuation professionals need to stay abreast of changes in accounting standards, valuation methodologies, and industry trends. They often pursue continuing education, attend professional conferences, and maintain memberships in relevant industry associations to enhance their knowledge and skills.
  

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Overall, the role of a Business Valuation Advisor, a trusted business advisor, is to provide an impartial and well-supported assessment of a company's value, assisting clients in making informed decisions regarding their business interests. Engaging experienced professionals, such as business brokers, investment bankers, or M&A advisors, can streamline the selling process and reduce the time it takes to sell a business. These experts can assist in business valuation, market research, and connecting with potential buyers, facilitating a smoother transaction.

If you’re asking yourself how long does it take to sell a business or should I sell my business and how much do I sell my business for? One of the key steps to selling a business that experienced Sellers take  is to hire a trusted business advisor who is an expert in business value consulting to accurately calculate value of a company and assist them with determining a realistic market value of a company.

As a trusted business advisor and sale advisor I appreciate the opportunity to share my years of experience working with Owners just like you. In fact you may want to consider our online program Sell Your Business 4 More. Click on the Eric Gilboord Coach cap above.