Business Valuation Services: Putting a Price Tag on a Business
Don’t pay too much when buying a business. First you find a business you would like to buy and get the asking price from the seller. Then have a cpa or broker tell you what the fair price is. Putting a value on a business is a separate function from auditing, evaluating or doing “due diligence.” There are three commonly accepted methods of valuing a business. These are:
- Based on Net operating profit: This is sometimes called a “Rule of Thumb” method. Profit levels of different companies in the same or similar industry are averaged together. A value is given based on a multiple of seller’s net profit from operations or seller’s discretionary income. (SDE)
- Based on Gross Sales: This is also called a “Rule of Thumb” but based on gross income or company sales rather than SDE.
- Based on the fair market value of the assets: This method determines the value of the used equipment in place and any goodwill there might be in the company. Customers and patents are among the most important goodwill assets. When a business is closed or when the assets are worth far more than the value of the operating business, this method is used.
There are many other methods but most valuations for smaller businesses are done by one or more of these three methods.
What is the actual market value of a business?
Of course the key to coming up with a value for each of these methods is to start with correct data. Any computation is only as good as the information we put into it. This is very true of business valuations. Good information “in” will give you correct conclusions “out.”
A lot of the information given to buyers is junk. Depending on what the seller says is questionable at best. You should get professional advice.
Getting Professional Advice
The least expensive professional business appraisal firms out in the marketplace start at $3,500.00. All the inexpensive valuation companies only use the financial data provided by the owner. They do not do any review of the source data. The liability of this is “garbage in, garbage out.” The most expensive companies do forensic audits and then appraise the business. They do this for costs of about $7,500. Attorneys use these reports for divorces, partnership liquidations, IRS purposes. They are also ordered by owners to show how they are justifying the asking price. The most expensive are used for court purposes.
Most business buyers do not want the cheapest and do not need the most expensive. We offer a basic valuation based on the provided data available at the time. The fee is a flat $700 per business. This can be done before a review or audit of the business has been done or it can be done after the business has been dissected and studied.
Also we offer a service including a review of the financials. This prevents having “garbage in” when we do the valuation. The price of this will be negotiated. In our valuation letter we estimate “The value of the business is (NUMBER.) This is based on a combination of the various methods.” We also provide our value for each of the methods. If you later get better information, the valuation can be updated and corrected at no additional charge.
What to do with a professional Valuation
We suggest that you do what the sellers do and use this report to explain or justify to a seller why you are offering the price you are. Remember, “What is good for the goose is good for the gander.”
Feel free to ask the office any questions you may have about this service.
