Valuing a Business

Determining the “Most Probable Selling Price” for Your Business is the First Step in the Process

Determining the value of a business is much more complex than determining the value of other assets such as real estate and is based on a variety factors:

  • Sales and earnings performance
  • Market outlook
  • Quality of its personnel
  • Fair market replacement value of equivalent operating assets
  • Company’s image, reputation, and goodwill
  • Buyer type
  • Terms and structure of the deal
  • Industry outlook

Helping a business owner determine an appropriate offering price is a critical function of the business intermediary.  For most smaller companies, our Pricing Evaluation Report (also known as a Broker’s Opinion of Value or Calculation of Value) is an appropriate method of setting a listing price for the business. However, as deal size and/or complexity increases, or if legal or lender requirements are being considered, a formal valuation/appraisal may be needed or desired.  In such cases, we work with leading national business valuation firms who complete hundreds of valuations per year and whose sole function is to provide business valuation services.  Most larger businesses are brought to market without advertising a listing price, but an understanding of pricing expectations is nonetheless still required.

Armed with this knowledge you can then move forward confidently with the decision to sell now, or wait and make improvements to increase the company’s value and marketability for sale at a later date.

Contact your VMW advisor to discuss which method of valuation is appropriate for your company.

  

Recasting the Financial Statements

When considering the sale of your business, determining an appropriate asking price, as well as probable deal structures is a critical first step in the process.  Our Certified Business Intermediaries begin by recasting the financial statements.

Most businesses track their financial performance by using balance sheets, profit and loss statements and tax returns.  In most cases it’s the cash flow that prospective buyers need to identify to better understand the overall health of the business.  The process of recasting (normalizing) the financial statements is essential in determining the value of a business.

The recasting process identifies such items as excessive and discretionary expenses and nonrecurring revenues and expenses.  Recasting provides an economic view of the company and allows meaningful comparisons with other similar businesses.

Owner benefits (salary, commissions, perks, incentives, personal loans and discretionary expenses) are considered and added back into the value of the company so a future buyer can adequately assess the business, its cash flow and future earning capacity.

A great deal goes into the process of determining the Most Probable Selling Price of a business and recasting the financial statements is an important first step.

Do You Know What Your Business Would Sell For?

A realistic estimate of the “Most Probable Selling Price” of a business is the cornerstone on which the process of selling a business is built.  Our Pricing Evaluation Report provides the business owner with:

  • Our opinion of the “Most Probable Selling Price” of your business
  • Likely deal structure
  • Bankability analysis (will lenders be inclined to support the transaction?)
  • Justification of purchase price (buyers test)
  • A view of your business from the outside in
  • Understand factors that drive your company’s value
  • Understand if seller participation in financing the transaction is needed
  • Identify areas of improvement to increase value for a sale at a later date
  • Construct a win-win transaction to help ensure it proceeds to closing

For the majority of our selling clients, our Pricing Evaluation Report is an appropriate method of setting a listing price for their business. However, as deal size and/or complexity increases, or if legal or lender requirements are being considered, a formal valuation/appraisal may be needed.  In such cases, we work with national business valuation firms who complete hundreds of valuations per year and whose sole function is to provide business valuation services.

For additional information on how a “Pricing Evaluation Report” can help maximize the value of your company, call or email today.  Of course, all communications will be held in the strictest confidence.