Archive for the ‘Business Valuation’ Category
Financial Advisors Urging Business Owners to Know the Value of Their Businesses
Because of the economic downturn, many business owners are reluctant to think about the value of their businesses. Fearful that their businesses have lost value, it’s the last thing they want to hear about. An article in Financial Advisor suggests that many business advisors are urging their clients who own businesses to have their businesses valued in order to gauge their business health and for planning purposes, including adjusting estate and succession plans.
Business owners have different reactions when they find out that their businesses are worth less than they once were. Some decide to delay selling their business, and others use it as an opportunity to make necessary changes. One business owner who was interviewed said that he was glad to know the value of his business because it enabled him to determine steps he needed to take to improve the business and prepare to potentially sell it within 10 years.
According to experts, some businesses are worth 30% less than a few years ago, and they argue that understanding the value of a business can help owners determine whether or not they should sell their business or bequeath it to the next generation. On a positive note, a lower valuation can benefit owners in terms of taxes right now. The article highlights the fact that if owners are planning to pass on the business to their children, now might be the time to do it, since estate taxes are “expected to rise next year and new restrictions on use of trusts could also be coming soon.”
By: Present Value
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How Does the Economy Affect Business Value?
Partnership Dissolution
We’ve written about succession planning, buying a business, and selling a business, and the importance of securing an accurate business valuation or asset appraisal in all of these scenarios. But what should you do in a partnership situation if one partner wants to sell and the other doesn’t? In this scenario, things can get a little more complicated.
Typically, if one business partner wants to sell and the other doesn’t, the partner who wants to stay in the business must buy out the other partner. The easiest way to handle this situation is to have written documents in place spelling out the circumstances under which a buyout can occur. These documents should be written when a partnership is formed, long before either partner would even consider leaving the business. But if these documents do not exist, there are still ways to handle this delicate situation effectively.
The first step is to determine the net value of the business. This includes all physical assets, like real estate or equipment, and all soft assets, like trademarks or business reputation. Also included in a business’s net worth are profits, as well as any outstanding debts or invoices. Determining the business’s net worth will help the partners decide, ideally through an intermediary, what to offer the partner leaving the business and how much money the remaining partner will need to raise in order to complete the buyout.
After the net value is determined, the partners can discuss the details of the transaction and make sure that their plan is feasible. In many cases, because this scenario can be difficult and emotional, it is best to hire a lawyer or a mediation professional to help in the process.
By: Present Value
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How Does the Economy Affect Business Value?
In The New York Times’ blog, You’re the Boss, there was an interesting perspective on business valuation in today’s economy. The post was titled “Still Waiting for the Value of your Business to Recover?” and the blog author turned to a professional business broker for answers.
The article gives great news for buyers and less than great news for sellers. Sellers who call in a professional appraiser to determine their business’s value in preparation for a sale may have to be willing to settle for a sale price less than the business’s worth. Buyers are skittish these days. They’re looking for a sure thing, and they may not have much cash to make a purchase.
But a seller shouldn’t necessarily wait for an economic recovery that will make his or her business worth what it was a few years ago because it might never happen. It’s the same advice given to people interested in selling their homes. And some sellers who want to retire or who have to sell because of financial reasons may not have the luxury of waiting. The good news is that there are things these owners can do to make their businesses more attractive.
For example, show some interest in your business. Make sure the grounds are attractive, your collateral is up to date, and workspaces are clear of clutter. Your interest will show potential buyers that this is a business to be proud of. Take a long, honest look at your business and decide if you’d be willing to pay the asking price. And of course, get an appraisal so that you know what your business is worth when negotiations begin. Finally, accept the best offer you can get, and then move on from your days of business ownership with pride.
By: Present Value
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Strive to Be Unique and Improve Your Business’s Value
Strive to Be Unique and Improve Your Business’s Value
There was an interesting article in the Fort Worth Business Press today called “Strive to be unique; it’s where the real value is.” The article discusses business owners who, after having a business valuation performed, want to know how to increase the value of their business. The predictable answer is to work toward increasing bottom-line profits, but there’s another, more effective way of improving your business’s worth: Differentiate yourself.
If this is something you’re interested in pursuing, the article offers a few things to try. For example:
- Offer superb customer service
- Work on developing your research and development capabilities
- Provide a reliable product
- Build a lengthy and enviable customer list
- Make sure that you have stellar people in key management positions
Other things that help your company stand out, but that you may not be able to control, include the ease with which other competitors can enter the market and whether your business is the only one of its type in your territory.
If you’d like to increase the value of your business, which is an especially good idea if selling the business is part of your plan, try implementing some of these techniques. Then test your success by contacting a reputable business appraisal firm and asking them to determine the value of your business.
By: Present Value
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Determining a Business’s Selling Price
There was an interesting article today in The New York Times blog, You’re the Boss titled “Determining Your Company’s Value: Multiples and Rules of Thumb.” In the article, the author describes a meeting she had with a business owner interested in selling his business. All of his paperwork was in order, the business was profitable, and he was determined to sell; however, she felt his asking price was way too high – 11 times the company’s EBITDA.
It is appropriate, when determining the value of your business, to include a multiple; however, there are standards that determine the multiples that you should use. For example, if the business owner talking to the blog author was selling a wind farm, his asking price wouldn’t have been too far off the mark. When selling a wind farm, you can multiply your EBITDA by 10.
Of course, there are many factors that go into determining a business’s value, such as intellectual property, competitive advantage, and inventory, but the bottom line is that determining a business’s value isn’t easy. That’s why it’s so important to work with a professional who understands all the factors that will help you determine the most accurate value of your business, which will help you decide on a sale price if you’re seeking a buyer.
By: Present Value
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Institutional Financing
Given that banks recently have been reluctant to make loans to businesses with stellar credit, businesses with poor business credit scores or start-ups have little chance of receiving a bank loan these days. In fact, studies have shown that fewer than 15% of start-up capital comes from banks. Luckily, there are ways to raise money other than by obtaining a bank loan, such as institutional financing. Institutional financing is capital that comes from institutions other than banks, such as credit unions, venture capitalists, and insurance companies.
One of the best ways to help ensure that your company will receive institutional financing is to be well-prepared for the decision. Work to increase your business credit scores by limiting your amount of debt and increasing your number of credit transactions; be able to prove your business’s growth potential; have a stellar business plan in place; and be prepared to tell a potential institutional lender your business’s current worth.
By securing a certified business valuation, you can make institutional financers sure that the business valuation you give them is USPAP-complaint and meets the standards of the Society of Business Analysts (SBA).
By: Present Value
Additional reading:
The Appraisal Foundation Announces 2010-2011 Edition of USPAP
Brand Strength Contributes to a Business’s Value
Synergy Marketing Group recently published an interesting white paper that discusses the importance of thinking of brand building as an investment in an organization. The white paper is titled “Brand Equity Is a Business Asset.”
One topic the white paper brought up is that a business’s brand is a frequently overlooked part of a company’s worth when a business valuation is performed because brand doesn’t fall neatly into one of the value categories researched during a valuation, like products, property, and personnel. It can also be difficult to attach a monetary value to brand strength. When an appraiser determines the value of brand strength, things that will be taken into consideration are the public’s awareness of your brand and the level of credibility they attach to it, your organization’s reputation, and overall customer satisfaction.
This is another reason why it’s important to work with an experienced, reputable appraisal company that understands not only the more easily determined value of property or equipment, but how to attach value to aspects of your business that may fall into the gray areas.
By: Present Value
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Glimmers of Hope in Small-Business Lending
After more than two years of stagnation, it appears that small-business lending is on the rise. The Thomson Reuters/PayNet Small Business Lending Index, which measures the overall volume of financing, increased 4% in March 2010, the first year-on-year gain since October 2007.
A recent Time Magazine article reported that many small and community banks are now seeing more demand for loans, which is a positive sign for the economy. According to the article, economists have expressed concern that despite the 3.2% first quarter economic activity growth, there was a lack of business lending activity. Business lending demonstrates business growth, they argue. Businesses in growth mode need financing to purchase equipment and hire staff, and without that there can’t be sustained economic recovery.
As we have discussed in previous posts, banks are lending money, but they are being more cautious about their investments. This means they are conducting more careful due diligence, which includes their own certified equipment appraisals and business valuations to ensure that they will recoup their losses should a loan default. Having a defensible, impartial appraisal in hand can help increase the chances of getting much-needed money for a small business.
By: Present Value
Additional Reading
5 Cs of Lending (How Appraisal Fits in Even Though It Doesn’t Start with C)
Still a Buyer’s Market
The number of businesses for sale that sold in the first quarter of 2010 increased slightly over the first quarter of 2009. Good news for those trying to sell, but according to an article in Entrepreneur Magazine, “4 Keys to Selling in a Buyer’s Market,” there is still pressure on sellers to lower their asking prices. The number of closed transactions is increasing, but revenue and cash flow multiples are decreasing at the same time. There’s no doubt that it’s a buyer’s market.
The article gives people interested in selling their businesses four important points to consider when selling in the current environment: Show potential buyers that there is a successful future in store for the business, consider offering seller financing, work to keep up with the business’s day-to-day operations while searching for a buyer, and price your business properly. This last tip requires that you have a clear idea of your company’s value, which you can get by hiring an appraiser. If you don’t know what your business is worth, you run the risk of setting its sale price too low, which could make prospective buyers think there’s something wrong with the business, or setting its sale price too high, which could put you into a time-wasting cycle of having to continually lower your asking price while searching for the right buyer.
By: Present Value
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Thinking about Estate Planning
Recently, in our post, “… And Then Get Back to Living,” we wrote about the importance of succession planning for every business. Last week, in Inc. magazine, there was a great article, “How to Create an Estate Plan,” which provides a step-by-step guide on the most effective ways to start thinking about planning for the future of a company. It emphasizes that this is something that all business owners need to be thinking about because huge legal issues can arise without a plan for how to pass on all the necessary information about the inner workings of a business should something happen to the business owner.
Some of the important takeaways from the article are:
- Keep an open dialogue with those who will be affected by the plan, such as family members and business partners.
- This is a process that lasts as long as the life of a company and it needs to be continuously refined and updated.
- Find people you trust to work with you on planning, including estate planners, attorneys, accountants, insurance providers, and of course business appraisers.
It’s something to think about because no business owner wants their hard work, blood, sweat, and tears to be all for naught. You can take steps now to ensure the future of your company.
By: Present Value
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