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Posts Tagged "business sale"

Tuesday, May 28th, 2019

Business Valuations: How to Select a Business Valuation Professional

 

Change money

 

By: Patrick Ungashick

Business Valuations & Exit Planning: A Business Owner’s Guide

This is part four of a four-part series on business valuations, written for business owners who need to understand how business valuations are used in the process of preparing for your business exit. As this series deals with tax and legal subject matters, readers are advised to consult their tax and legal advisors. This material is for educational use only. 

How to Select a Business Valuation Professional

There is no such thing as a completely objective business valuation. Every business valuation involves some degree of judgment, which means subjectivity. A human being who values a company has countless decisions and judgment calls he or she must make during the valuation process: which valuation methods to use, what data to include or exclude, how to factor in non-quantifiable issues such as risks, opportunities, market conditions, and more. Even if you are using a software program to do a valuation, subjectivity is introduced by the judgment calls made by the person(s) who programmed the application, and again by the person entering the data. Therefore, if you need a business valuation a critically important question becomes who do you use to do the work?

There is an additional reason to carefully consider who should perform your business valuation. Getting a business valuation is like buying an insurance policy—that valuation may be called up to help protect you against claims against your interests from unfriendly parties, such as a disgruntled business partner, a divorcing spouse’s lawyers, or perhaps even the IRS. Not all business valuations are created equal. The quality of the valuation, and the party who performed it determines how durable that “insurance policy” will be if called upon.

Unfortunately, it’s never been more challenging to determine who you should use to get a business valuation. There are no formal college or university degrees in business valuations, and no state or federal licenses exist. Consequently, many professional advisors will say “Sure, we do business valuations” if asked. An online search turns up countless websites, programs, and calculators that offer low-cost or even free valuations. While free online valuation calculators may be fun to play with, they cannot provide the level of accuracy and assurance that comes with a valuation done by a qualified expert. So, when investigating who to turn to, consider the following:

Professional Experience

While no formal education or licensing requirements exist for business valuations, several organizations offer professional certifications in this field. Look to work with valuation professionals who have at least one of these credentials (listed in alphabetical order):

  • Accredited in Business Valuation (ABV). This designation is only to certified public accountants (CPAs) who have passed an exam and have met several thresholds of minimum valuation experience.
  • Accredited Senior Appraiser (ASA). To earn the ASA, an applicant must meet specific educational requirements, pass a comprehensive exam, submit their work product to a peer review process, and possess five years of full-time business valuation experience.
  • Certified Business Appraiser (CBA). Applicants must meet certain educational requirements, pass a comprehensive exam, and achieve either 10,000 hours of business valuation experience or complete 90 hours of advanced course work. As with the ASA, applicants must also undergo a thorough peer review process.
  • Certified Valuation Analyst (CVA). Like the ABV, this credential is only available to CPAs. Applicants must pass a comprehensive exam and complete required course work.

As of the time writing this article, only about 5,000 professionals in the US hold at least one of these credentials. The good news is once you know what to look for, it is not difficult to find them.

How to Find Your Valuation Professional

Should you need a formal business valuation, consider the following steps:

  • Ask your existing trusted advisors to refer you to valuation professionals that they know, and hopefully have worked with in prior situations. As a backup method, research online valuation professionals in your area and/or who have experience in your industry.
  • Meet or speak with several candidate professionals, share your situation, and ask them how they would approach your needs.
  • After initial discussions, ask for a written proposal including a fee schedule and project timeline. Be sure you understand the information and work required of you during the valuation process.
  • Once you have selected the valuation professional whom you prefer to work with, have your lawyer review their service contract or agreement. It should contain clear and favorable language about how this professional will respond if called upon to defend their valuation in court, arbitration, or in front of a regulatory agency.

Be sure to review the previous articles in this series (if you have not already) to learn when you might need a valuation, how the valuation process works, and to understand the more common valuation methods. Valuations play an essential role in many business owner’s exit planning process—it pays to know the basics of how they work.

Your Next Steps

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If you have a quick question coming out of this article or, if you want to discuss your situation in more detail, we can set up a confidential and complimentary phone consultation at your convenience contact Tim 772-221-4499.

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Monday, May 20th, 2019

Business Valuations: Business Valuation Methods

Valuation chalk board

By: Patrick Ungashick

Business Valuations & Exit Planning: A Business Owner’s Guide

This is part three of a four-part series on business valuations, written for business owners who need to understand how business valuations are used in the process of preparing for your business exit. As this series deals with tax and legal subject matters, readers are advised to consult their tax and legal advisors. This material is for educational use only.

Business Valuation Methods

Determining the value of a privately held company is a combination of science and art. Professional appraisers have a toolbox full of valuation methods available to them to calculate the value a company (or in some cases a partial interest in that company.) Applying these methods and doing the math correctly is science. But selecting which method or methods to use is art, because that is determined by the appraiser based on his or her judgement. For you, it is important to know some of the more common methods so you can intelligently discuss them with your valuation professional, because which valuation methods the appraiser uses can produce a dramatically different result. For example, one method might produce a $50 million valuation for a company, while another method might produce a $25 million valuation for the same company—the differences are often that dramatic. So which valuation method, or methods, your professional applies to your company is a critical issue that many business owners overlook or don’t know enough to ask.

There are many valuation methods available to the appraiser, and many methods have several variations. You do not need to be an expert on this topic, but several methods are essential to recognize. They are:

Business Valuation Method #1 – Market Capitalization

Market capitalization, or “market cap,” is arguably the simplest method of business valuation. It is calculated by multiplying the company’s current share price by its total number of shares outstanding at that point in time. For example, if a company’s current share price is $100 per share, and there are one million shares of the company outstanding, then the market cap is $100 million.

Market cap is simple, but it’s typically only applicable to publicly-traded companies because privately held companies don’t have shares traded in the open market. Despite this, it is still important to know what market cap is because part of the valuation process might involve comparing your privately held company to the market cap of publicly traded companies.

Business Valuation Method #2 – Market Value

The market value method attempts to calculate a company valuation based on comparing your company to similar companies in the same industry that have recently been purchased. Market value is perhaps the most subjective method because the professional appraiser must determine and select which companies are comparable despite that in the real world there are no exact matches. Once comparable companies have been identified, then the appraiser must use his or her judgement and apply weighting factors to companies that are dissimilar in characteristics. For example, if your company is doing $25 million in revenue and the valuation professional is looking at data about an industry competitor which recently sold, but this competitor is a $1 billion company, that’s not an apples-to-apples comparison. In that case, the appraiser likely would discount the multiple used on the $1 billion company sale to some lower number applicable to your $25 million company. All of this requires the valuation professional to apply his or her judgement, which is subjective.

All that said, the market value method focuses on understanding what your business might be worth in the open market.

Business Valuation Method #3 – Multiple of Earnings

This method is one of the most important, particularly when considering selling some or all of the company to an outside buyer. Under this method, the company’s recent earnings are applied to a multiplier, which varies with the industry and the economic environment. For example, if the company did $3 million of EBITDA last year and the current multiple for that industry is six, then the potential valuation is $18 million. Typically, the period of time used is the prior calendar year or the trailing twelve months, although if earnings have been volatile over the last few years a weighted average might be used. It is critically important when working with this method that you have accurately calculated your EBITDA, as there are many factors to consider and considerable room for making judgement calls on how certain expenses are treated.

Business Valuation Method #4 – Multiple of Revenue

Under the multiple of revenue method, a stream of revenues (rather than earnings) generated over a certain period of time is applied to a multiplier, which varies with the industry and economic environment. Like with the multiple of earnings method, the period used is commonly the prior calendar year or trailing twelve months, although if revenue has been volatile over the last few years, a weighted average might be used. This method is less commonly used than the multiple of earnings method. It is typically only used in certain industries, such as professional services firms (accounting, legal, engineering, consulting, etc.) and some tech industries.

Business Valuation Method #5 – Discounted Cash Flow (DCF)

DCF is similar to the multiple of earnings method. Using DCF, the valuation professional computes a valuation by taking a projection of the company’s future cash flows, and then discounting them to a single present value—so that cash earned in later years is discounted more heavily than cash earned in more immediate years. The main difference between DCF and the multiple of earnings method is that DCF takes into account inflation and the time value of money when calculating the present value.

Business Valuation Method #6 – Book Value

Book value is simply the value derived by subtracting the total liabilities of a company from its total assets. Book value, therefore, assumes that the company goodwill is zero. Book value is often synonymous with the company’s liquidation value. Book value is typically used in specific situations, such as, companies that have considerable value tied up in their tangible assets. Even when used, book value as a valuation method is not commonly used by itself but rather is often calculated and then included alongside other valuation methods to produce a weighted overall value. (See below.)

This is by no means an exhaustive list of the business valuation methods available to the valuation professional. Also, if you are trying to learn more about these methods take note that different valuation professionals may use different terms to describe the same method, which can be frustrating. However, being familiar with the six listed here provides a foundation from which you can discuss how your valuation professional will select and apply a particular valuation method to your situation.

Business Valuation – A Weighted Approach

Now that we understand there are different valuation methods available to the appraiser, and each method examines different issues and emphasizes different areas, it becomes clear why different business valuations can produce widely varying results even when appraising the same company. To address this, and to create a more balanced and realistic analysis, valuation professionals will commonly calculate a business valuation using multiple methods and then take a weighted average of those methods to produce a final, bottom-line valuation.

While this step reduces some of the disparity between results produced by different methods, it introduces another round of subjectivity into the process as the appraiser has to determine which methods to use, and then how to weight the results. Generally, certain methods tend to earn a greater weighting depending on the nature of the business, the presence or absence of specific data, and the purpose of the valuation. If you hire a valuation professional to appraise your company, it will be vital to discuss which valuation methods are being used and why, and how and why the professional determined the weighted analysis.

Your Next Steps

Click to register to receive subsequent articles in this series.

 

If you have a quick question coming out of this article or, if you want to discuss your situation in more detail, we can set up a confidential and complimentary phone consultation at your convenience contact Tim 772-221-4499.

 

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Thursday, October 4th, 2018

Ever Hear of ZBB? It Can Make You $$$

If you intend to exit by selling your company, either to an outside buyer (a competitor, private equity group, etc.) or an inside buyer (one or more employees), the price you receive at sale will likely be closely tied to the company’s earnings. The higher the earnings, the higher the likely sale price.

Team whiteboard

As we know, there are two potential ways to grow earnings — increase revenue and decrease expenses. Both methods can maximize earnings prior to selling your business. In our experience, many companies underestimate the amount of expense reduction that is possible prior to selling the company, without harming morale, the team, or key operations.

Remember, if you sell your company for a multiple of six times earnings (commonly calculated as your adjusted EBITDA), then every $1 of expenses you reduce potentially adds $6 to your selling price. Expense reduction prior to sale is a significant opportunity that many owners miss.

How ZBB Can Help Transform Cost Management

That’s where ZBB comes in to help. ZBB stands for zero-based budgeting, and it’s a little-used and often-misunderstood financial management tool. Zero-based budgeting simply means creating an annual budget for the company by starting at dollar zero, then adding expenses into the plan from there.

For each new expense, company management has to justify the item and amount, thus forcing a rigorous and thorough line-by-line examination of expenses that challenges old assumptions and habits each step of the way. (“Why do we spend money on that? Gee, I am not sure. I guess because we always have…”)

An excellent online article from McKinsey, one of the world’s largest consulting companies, describes how ZBB transforms cost management:

 

ZBB

 

 

Create a Culture of Accountability and Transparency

Learning and adopting ZBB does not require nor lead to cutting expenses to the bone, as the McKinsey article points out. ZBB compels a more thorough, transparent, and objective look at expenses than many companies would otherwise implement.

When going through a ZBB exercise, it can be helpful to ask aloud “would anybody miss that?” as you and your team consider adding items back into the budget, working up from zero. If you don’t hear a loud outcry within the company that a certain expense would be sorely missed, that’s a clue that the expense in question might be better converted into a savings.

Properly implemented, ZBB is more surgical than draconian, and it can help create a culture of ownership thinking, accountability, and transparency.

Why ZBB Is a Worthwhile Effort

Many business owners, CFOs, and leadership teams are unfamiliar with ZBB and its methods. Some try ZBB but get bogged down in the details. Others fail to realize that ZBB is more than just a financial exercise; implementing ZBB can require rethinking employee communications, internal reporting, and even executive compensation.

The effort can be worth it. Following ZBB practices and principles, it is not usual for companies to realize high single-digit or low double-digit reductions in SG&A expenses. Sustained until company sale, that reduction can generate dramatic returns from increased selling price.

To learn more about ZBB, task the company CFO with studying the issue and reporting his or her findings to the team. There is excellent information online, including the article cited above as well as this article by Forbes. Additionally, contact us at NAVIX to discuss your exit plans and how we can help you and your team maximize your company’s sale price at exit.

 

To discuss your unique business, and how to plan for and achieve a successful exit,  Call 772-210-4499  or email Tim to schedule a confidential, complimentary consultation.