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Want a Business Valuation? Key Steps for Business Owners

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The Significance of Business Valuation

For small and lower-middle-market business owners, understanding the value of their enterprise is not just a matter of curiosity; it’s a cornerstone of strategic business management. When you want a business valuation, it’s often a signal of crucial business milestones – whether you’re considering selling your business, seeking new investors, or planning for future growth. A precise valuation provides a clear picture of your business’s financial standing, offering insights that are vital for informed decision-making.

Valuation goes beyond simple number crunching. It’s an intricate process that reflects your business’s market position, its financial health, and potential for growth. For small business owners, a valuation can be a powerful tool in negotiations, be it for securing investments, setting a sale price, or even for legal and tax purposes. It also serves as a benchmark for measuring business performance and progress, helping owners to identify areas of strength and opportunities for improvement.

Identifying the Right Time for Valuation

Determining the right time to seek a business valuation is as important as the valuation itself. Various scenarios may prompt business owners to want a business valuation. These include:

  1. Preparation for Sale: If you’re planning to sell your business, a valuation gives you a basis for setting a fair and competitive asking price. It helps in understanding what your business is worth in the current market, ensuring you don’t undervalue or overprice it.
  2. Seeking Investment: When looking for investors or applying for loans, a current valuation can strengthen your position. It demonstrates financial transparency and provides potential investors with a clear understanding of what they’re investing in.
  3. Strategic Planning: Regular valuations can be a part of your strategic planning process. They offer insights into how well your business strategies are working and where you can improve.
  4. Succession Planning or Partnership Changes: In cases of succession planning, bringing in new partners, or buying out existing ones, a valuation is essential to ensure fair transactions.
  5. Tax and Legal Purposes: Certain legal and tax situations, such as divorce settlements or estate planning, may require a business valuation.

Understanding these triggers can help you time your valuation appropriately, ensuring that the information it provides is relevant and useful for your specific needs.

Choosing the Appropriate Valuation Method

Selecting the right valuation method is crucial to obtaining an accurate assessment of your business. The choice depends on various factors, including the nature of your business, the purpose of the valuation, and the specifics of your industry. Common valuation methods include:

  1. Asset-Based Approach: This method is suitable for businesses with significant tangible assets. It involves calculating the net asset value of the business by subtracting liabilities from assets.
  2. Earnings-Based Approach: Ideal for businesses with steady profits, this method focuses on the potential future earnings. Techniques like Discounted Cash Flows and Capitalization of Earnings fall under this category.
  3. Market Value Approach: This approach compares your business to similar businesses that have been sold recently. It’s effective in markets with ample data on business sales.
  4. Cost Approach: Used primarily for new businesses, this method calculates how much it would cost to build a similar business from scratch.
  5. Income Approach: This method is based on the income the business is expected to generate in the future and is often used for businesses with predictable and stable income streams.

Each method has its strengths and is suited to different business scenarios. For instance, the asset-based approach may be more relevant for a manufacturing company with substantial physical assets, while the earnings-based approach could be more appropriate for a service-based business with consistent profits.

The Role of Professional Valuators

When a business owner expresses a desire for a valuation, engaging professional valuation services can be a game-changer. These experts bring an objective perspective, deep understanding of valuation methodologies, and insights into market trends. Their expertise is particularly beneficial in complex scenarios where multiple valuation methods may be applicable, or where specialized knowledge of an industry is required.

Professional appraisers can help in several ways:

  1. Objective Analysis: They provide an unbiased assessment of the business’s value, which is crucial for negotiations and decision-making.
  2. Comprehensive Approach: Experts use a combination of valuation methods to arrive at a more accurate figure, considering all relevant aspects of the business.
  3. Market Insights: Their understanding of current market conditions and trends ensures that the valuation reflects the reality of the market.
  4. Credibility: A valuation from a reputable professional can lend credibility to your business in negotiations with potential buyers or investors.

Preparing for the Valuation Process

Preparation is key to a successful business valuation. When a valuation is needed, take the time to prepare and this can lead to a more accurate and beneficial outcome. Here are steps to help you prepare:

  1. Organize Financial Records: Ensure all financial statements are up-to-date, accurate, and well-organized. This includes balance sheets, income statements, and cash flow statements.
  2. Understand Your Industry: Be aware of current trends, challenges, and opportunities in your industry, as these can significantly impact valuation.
  3. Identify Unique Value Drivers: Highlight aspects of your business that add unique value, such as proprietary technology, strong customer relationships, or a robust management team.
  4. Consider Future Earnings Potential: Be prepared to discuss future growth plans and how they will increase the business’s value.
  5. Address Any Liabilities: Understand and be ready to explain any liabilities or challenges the business faces and how these are being managed.

Leveraging Valuation for Business Growth

A business valuation is not just a tool for selling or buying a business; it can be a powerful instrument for strategic planning and growth. When you need a valuation, it provides you with critical insights into the financial health and potential of your business. This information can be used to:

  1. Identify Growth Opportunities: Understand areas where your business is excelling and where there is room for improvement.
  2. Attract Investors: A solid valuation can make your business more attractive to potential investors or lenders.
  3. Plan for the Future: Use the insights from the valuation to inform your business strategy and long-term planning.
  4. Benchmark Against Competitors: Understand where your business stands in comparison to competitors and the industry as a whole.

External Resources for Further Guidance

For additional insights into business valuation, consider exploring these authoritative resources:

  1. Business Valuation for Entrepreneurs – Entrepreneur
  2. Understanding Business Valuation – Harvard Business Review

Final Thoughts on Business Valuation

In summary, understanding when and how to conduct a valuation is crucial for small and lower-middle-market business owners. Whether you need the value for selling your business, seeking investment, or strategic planning, a thorough and accurate valuation is key to making informed decisions.

Remember, the value of your business is not just in its current financials but also in its potential for future growth. Engaging with professional valuation services can provide you with a clear, comprehensive, and credible valuation, which is an invaluable tool in any business transaction.

If you’re considering a valuation and need expert guidance, don’t hesitate to reach out to professional valuation services. With their expertise, you can navigate the complexities of valuation and achieve a clear understanding of your business’s worth.

Getting Help When Selling Businesses in Austin, TX

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Although buyers for Austin businesses are not in short supply, matching a buyer with an existing business isn’t always as simple as it might sound. That’s why area Austin business brokers and mergers and acquisitions experts suggest anyone contemplating selling a business work with an area professional for the best results.  In the last few years, selling businesses in Austin TX has become much more complex due to the number of companies and individual buyers moving from out-of-state to the Austin area.

Industry experts report Austin area and Central Texas are expected to experience significant growth over the next five to ten years. That prediction suggests business owners considering marketing their organization should explore their options soon to determine when to sell.

Getting Started: Evaluate the Value of a Business

Anyone asking how to sell a business in the Austin area wonders how the process actually starts. The first step is to determine the value of the business. Properly evaluating any business requires a certain level of expertise as there are many factors involved in the determination of value.

When selling a business, gross revenue figures, profit margins, equipment, and inventory all have values. Intangibles like reputation and goodwill also play roles in the business valuation, but are a little more difficult to put an exact figure on.  Here at CGK Business Sales, we have a particular expertise in business valuations.  We have been trained at some of the highest levels and passed some of the most difficult tests in the industry.  We will give you a realistic value range for your business.  We are not here to give you an absurdly high price and wait for the buyers to beat that price down.  We don’t think that’s fair.  Often, we hear of other business brokers in Austin who do this.  Then, the business does not sell and just sits on the market.  Meanwhile, these less-trained business brokers have burned some of the best, most-interested buyers.  We give you an idea of how the buyer may look at your business, how the bank may value it, and how the third-party valuation companies (in SBA deals) would look at your business.  All three of these types of stakeholders have different motivations and will look at your business in different ways.  For larger businesses, this process gets even more complex.

Putting the Best Foot Forward: Developing a Confidential Information Memorandum (CIM)

Marketing is somewhat of an art, and Austin business brokers and mergers and acquisitions professionals understand how important it is to present a business in the best light possible. The Confidential Information Memorandum (CIM) must contain all the information prospective buyers need to determine if an acquisition is viable.

Business brokers must become marketing experts, who work closely with the business owner. These mergers and acquisition professionals must give out enough information at this stage to make a buyer interested, while protecting confidential information.  Some information must, by its very nature, remain confidential during early marketing stages. At some point, later, during due diligence, all pertinent information must be disclosed to buyers.  But, at this point, the Confidential Information Memorandum’s objective is to put the business in the best possible light and then determine which buyers are more likely to take that next step in the buying process.  This is a delicate balance.  The Confidential Information Memorandum must be thorough enough to cover all the basics and then some, while protecting the seller from competitors who might use that information for their advantage.  Keep in mind, any buyer that wants to see the CIM must sign a non-disclosure agreement (NDA) ahead of time.  We also find out background information on the buyer to determine who they are, what company they are with, and whether they are financially qualified to buy the business before they see the CIM or find out any information, at all, about the seller’s business.

Moving On: Matching Buyers with Sellers

Not every business buyer matches the needs of specific sellers, which means Austin business brokers and mergers and acquisition specialists must work diligently to match a seller with an ideal buyer for their business. In some cases, that may take a little time, as the pool of buyers is in constant fluctuation. However, when determining how to sell your business, business brokers become marketing professionals and have the experience and connections necessary to pair sellers with prospective purchasers.

Negotiating Skills: Experience Makes a Difference

Austin business owners frequently ask business brokers to “sell my business” because they realize the mergers and acquisitions professionals have the skill sets necessary to negotiate a transaction properly. When the objective is to net the highest profit possible from the sale of a business, owners rarely have all the experience necessary to negotiate prices and terms effectively.  Remember, it’s not just the highest price that should always win.  The terms are very, very important to a business sale.  With sophisticated buyers, this is a common tactic; promise the highest price, but make the terms very stringent to get that highest purchase price.  Also, as deal size grows, deal structure becomes more important.  If the seller is to net the highest after-tax proceeds, careful planning is necessary, not just from your attorney or tax professional, but from the business broker, as well. When it comes to selling businesses in Austin TX, not all business brokers are created equal. We have negotiated with the most sophisticated types of buyers down to first-time buyers.

Getting to the Closing: Facing Those Inevitable Problems

Any business for sale will face problems between the signing of a letter of intent (LOI) to purchase and finalizing the transaction. There is a significant amount of due diligence that any buyer will want to do.  Even if the buyer is inexperienced, they will usually hire service providers that are experienced in this process.  Of course, if the buyer is a private equity professional or larger corporate buyer, they will have multiple types of diligence teams who will help with the due diligence process.  It’s usually best if any problems are disclosed ahead of time.  It’s a fact of life that issues no one anticipated will emerge. Your better business broker and mergers and acquisitions professionals deal with those challenges on every deal.  They will make sure the transaction closes and everyone involved is satisfied with the results.

Taking the First Step: A Simple Phone Call Gets the Ball Rolling

If you’re considering selling a business anywhere in the Austin area, it pays to consult industry experts early in the process. Doing so virtually eliminates the problems many business owners confront when going forward with a sale. If you’ve got questions about how to sell a business, the answers are only a phone call or email away. Contact an Austin business broker for help, today.  CGK Business Sales has the education, experience, and patience necessary to get your business sold.  Call us today at 512-900-3770 and we’ll be happy to speak with you in greater detail about selling businesses in Austin TX.

How to Increase the Value of Your Business Without Generating More Profits

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No matter the economic climate, it’s important for business owners to start monitoring their companies’ value up to five years before making an exit. Though most assume that business valuation is focused only on multiples, forecasts, and return rates, it’s more qualitative than it seems.

A valuation is a prediction of a company’s prospects, and to reflect those goals accurately, business owners must identify things that enhance value. Those factors, of course, vary by industry, but we’ll offer some value-adding tips here.

Increase Access to Capital

The smaller a company is, the less access it has to equity and debt capital. To increase your business’ value without a corresponding spike in profits, you’ll need to determine which type of capital will meet your goals. Ask these questions:

  • Is the company leveraged? If so, how?
  • How is the business’ future affected by bank covenant restrictions?
  • Are loans personally guaranteed by shareholders?
  • Is it possible to bring in outside investors to meet future capital needs for growth?

With the answers to these and other questions, you’ll have the information needed to gain greater access to capital.

Building a Bigger Customer Base

A diverse, yet solid customer base is crucial to a company’s ongoing viability. When businesses profit by focusing solely on big clients, they grow to depend on them. It’s not good to concentrate revenue with just a few customers; companies must allocate customer concentration in ways that reduce the risk of revenue loss. Ask how much the company’s top clients contribute to its revenues and find out how much of that revenue recurs. By determining the useful economic life of the customer base and the company’s biggest clients, it’s possible to position yourself in a way that reaches more people.

Use Economies of Scale

As output increases, the cost per unit goes down. Whether it’s done by spreading the capacity cost over a higher volume or offering quantity discounts, large companies possess significant advantages in some markets. Consider the answers to these questions:

  • Is the business leveraging its cost savings effectively?
  • Are there any opportunities to realize larger or additional economies of scale?
  • Can I enter a joint venture or outsource production to reduce expenses and gain more buying power?

With an economy of scale, owners can increase their companies’ value by ramping up output without spending more money.

Engage in External Financial Monitoring

Through financial analysis, trends are measured, assets and liabilities are identified, and a company’s performance is compared to that of similar firms. When financial statements are compiled and prepared in-house, it may keep managers from seeing things with an unbiased eye—and it may make potential buyers question the accuracy of the data.

Before taking this step, ask yourself how the company compares to others in terms of profitability, solvency, activity, and liquidity. Have financial controls been implemented, and are finances reviewed by an outside accountant? If the answer to any of these questions is “no,” it’s time to bring in some help from an external source.

Invest in the Company’s Human Resources

Employees are the engine that keeps a successful company moving. Crucial value-adders include the skills, experience, knowledge, creativity, and training workers bring to a company, as well as the corporate culture.

When considering the value of human capital, focus on quality controls and the effectiveness of the company’s service and production capabilities. The depth of the management team is another thing to think about. Does the company depend on a single person for customer contacts, production skills, or technical support? If so, it’s important to have a succession plan in place.

Work on Branding and Marketing Strategies

Marketing establishes a connection between the customer’s requirements and their responses to the services and products they’ve been offered. With a memorable brand, you’ll boost sales through market recognition and you’ll also improve the company’s operational efficiency.

When forming a sales strategy, assess the company’s marketing shortcomings and capabilities. How well-known is the brand, and does the company have a strong online presence? Companies are more valuable when branding reflects their mission.

Diversify Your Offerings

Niche companies often derive their strength from a narrow focus, but specificity may lead to a lack of diversity and a dependence on a small market. Owners of such businesses often find that their most important clients prefer to deal with wide-range suppliers, which leads them to expand offerings or sell to a larger competitor. With diversification comes lower risk and increased value.

Consider the breadth of the company’s offerings. Are any of them subject to market fluctuations? Can you offer different products and services that use existing customer bases, production capabilities, and human capital? When businesses are horizontally and vertically integrated, they’re more valuable in the eyes of buyers.

Become More Tech-Savvy

Businesses with few resources often find research and development a challenge, as they struggle to keep up with the market’s technological changes. These companies typically spend most of their money and time on the development of just a few products. This strategy usually results in the obsolescence of services and products, slow growth, and market share losses. Meanwhile, bigger companies, with their technological expertise, find it easier to offer products that meet customers’ needs.

Before improving the company’s technology, focus on the allocation of resources to research and development. Do you use updated tech, and will upcoming changes adversely affect your service and product offerings? Answering these questions will help you identify areas for technological improvement and make the company look better to buyers.

In Closing

Continuous assessment of a business’ value drivers will increase the chances of success. Valuation involves a thorough qualitative and quantitative assessment that should be a key part of a company’s operating procedure. With a proper valuation assessment, you’ll be left with meaningful and actionable information that maximizes returns and highlights the company’s intrinsic value. If you’re looking to sell a business in the area, consult the experts at businessbrokersaustin.com for help, service, and advice.

3 Business Valuation Methods You Need to Know About

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Business owners who are ready to sell their business will often wonder, what is my business worth? This is likely the first question they’ll ask themselves since it is the most important; the value of the business determines how much they can obtain if they sell the business. There are a number of different business valuation methods that are in use today, but three that any small business owner will want to know about are the asset approach, the discounted cash flow approach, and the comparable transactions approach.

Asset Approach to Valuation

This business valuation approach is done by determining the values of the assets and liabilities for the business. The liabilities are subtracted from the assets, and the difference is going to be the value of the business. This can be a great way to determine the value of the business if it’s simple to determine the value of all assets and liabilities. However, this doesn’t take into account things that are valuable to the business but that don’t have a price that is easily determined. Also, the owner of a small business keeps some of the assets, while paying off the liabilities. Call us today to find out what these are. For most small businesses, the asset method is only used in case of liquidation. In most cases, though the business is worth more than just the hard assets. The intangibles of the business most also be considered. This is where things get tricky. Read on to find out more.

Discounted Cash Flow Approach

This method takes into account what the business makes in the future. The future amount the business could earn is determined, then a discount rate is applied to determine the present value of those cash flows. This is the way Warren Buffet would value a business. This is the methodology he uses to find what the “intrinsic value” of a business is. This is also what the analysts and portfolio managers use on Wall St. You may find some of this discussed on financial television shows, such as those found on CNBC. Since underlying almost all stocks is a business, we can also apply this to small businesses. Since small businesses by nature are more risky than large businesses, the discount rate for small businesses are generally higher than for middle-market businesses or publicly-traded firms. With the new energy and marketing programs injected by the new owner, this can let potential buyers see how well the business could do in the future by comparing the current price of the business with the amount the business could earn in the next few years. If this value is larger than the current cost of the business, it can help attract more buyers when the business owner is ready to sell. This methodology is complex and fraught with endless possible input errors. This valuation method is best left to professionals who know those inputs, otherwise, a discounted cash flow could give nearly any value for a business. Luckily, I learned this methodology well in business school and as part of receiving my CFA and CAIA charters.

Comparable Transactions Approach

This is a common way to determine the value of a business. The business model is compared with similar ones that have been sold recently to determine the value of the business. This method takes into account the current market for buying and selling businesses. Many people would understand this as the “multiple” method. Meaning, many buyers will use last years’ earnings or an average of multiple years, if the business’s earnings are inconsistent, and use a multiple of those earnings. This multiple can change somewhat, depending on the stage of the business cycle. If the economy is at a low point, multiples tend to contract, while in bull markets they tend to expand. It can be an effective way to market a business and is one that has often been used in the past to determine the value of a business before it is sold. We would remiss if we did not mention that every business is different, so it is best to understand where your business stands, before going to the market. How much is your business worth? To a degree, that is in the eye of the beholder. We can let you know how buyers may view your business.

Choose the Right Valuation Approach

Business owners will want to make sure they take the time to learn more about the various approaches that can be used and work with a professional to ensure they find the right one to help them determine the valuation for their business to help them with a sale. A business broker or mergers and acquisitions advisor is going to be able to work with the business owner to determine which of these approaches is going to be the right one (or ones) to use for their business to prepare for a sale.

So which valuation method is the right one for your business and what are the differences between them for your business? Speak with a mergers and acquisitions advisor today to learn more about selling your business and about how to choose the right business valuation. How much is your business worth? This is an important step you’ll want to do carefully when you’re ready to sell your business. Call CGK Business Sales at 512-900-3770 to learn more.

Things to Know About Business Valuation

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Businesses change ownership for a variety of reasons. Whether they’re merged, divided among partners, sold, or given away, ownership of even a stable business is subject to change at some time. When this happens, involved parties must have an accurate idea of the value of the company’s assets. This makes business valuation an important part of the transfer of ownership. Below are several things to remember when seeking a business valuation or learning how to sell your business.

Its Purpose

A company’s assets may change hands for various reasons that can affect how the company is valued. For instance, valuations for estate and gift tax returns are determined differently than those for divorces and shareholder disputes.

The Date of Valuation

A valuation’s date can significantly affect the business’ value. For example, a most business’ values would likely have diminished in 2008-2009 because of the devastating effects of the crash of the Great Recession.

The Value Standard

Valuations are put into three different categories: fair value, fair market value, and strategic or investment value, as defined in the sections below.

  • Fair value is typically used in divorces and stockholder disputes; it excludes discounts for lack of control or marketability.
  • Fair market value is the price for which a property would sell between a well-informed and willing buyer and seller.
  • Investment or strategic value is the value to a certain investor based on their expectations and requirements. It’s commonly used in mergers and acquisitions when a business buyer plans to change positions or product lines.

Before selling a business, a business’ current owner should consider the category into which the valuation falls.

The Value Premise

This is an assumption of the circumstances that may apply to the valuation. There are four categories to consider.

  • Book value, which is the total value of the assets minus the company’s liabilities
  • Going concern, which is the business’ value under the assumption that operations will continue
  • Liquidation, or the value of the business if it were to be ended and all assets divested
  • Replacement value, or the cost of replacing all the company’s assets with newer versions

For nearly all of our customers, who are normally selling a business that will continue on with the next buyer, the going concern methodology will be the one we use. When selling or buying a business, it’s important to have accurate financial statements during the valuation phase and beyond. With good financials, an owner can form a successful exit strategy and a new owner can assume control being fully informed. Visit the website for more information on how to sell a business.

Contact Us

CGK Business Sales

401 Congress Ave

Austin, TX 78701

phone: (512) 900-3770

website: https://businessbrokersaustin.com