Business Valuation Services: Putting a Price Tag on a Business
Putting a value on a business is a separate function from auditing, evaluating or doing “due diligence.” There are three or more generally 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 their 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 computer 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.”
Since a lot, of the information given to buyers is junk, putting a value on a business is questionable, at best. We include on our valuation opinion letters that “based on the information provided we believe the value overall is A 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. The least expensive professional business appraisal firms out in the marketplace start at $3,500.00. The most expensive, do forensic audits and then appraise the business, for a costs of about $7,500. Attorneys’ use these reports for divorces, partnership liquidations, IRS purposes. They are also ordered by business owners to show prospective buyers how they are justifying the asking price. All the inexpensive valuations companies are using the financial data provided by the owner without any review of the source data. The most expensive are used for court purposes.
Most business owners or buyers do not want the cheapest and do not need the most expensive. We will tailor a price which includes doing a preliminary financial review of the financials so that we do not have garbage “In.”
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.
The price includes a review of the financial statements to determine their reliability. Then based on the facts given, we will give you our opinion, and if you get better information at a later date, we will update the valuation at no additional charge. 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.