The Business Valuation
Whether you are buying or selling, you need a valuation to determine how much the business is worth. Can you do this yourself? Maybe if you have an accounting background, but most buyers and sellers will need to consult with a CPA.
What kind of CPA? Look for one with a CVA accreditation. This tells you the CPA is a Certified Valuation Analyst, which not all CPA’s are. To obtain a CVA accreditation, accountants need to go through roughly 6 weeks of coursework, pass an exam, and maintain continuing education credits. Good business brokers have relationships with these types of CPA’s.
Your business financial statements and business tax returns are essential when working with a CVA, so keep these documents organized. A CVA likes to have 4-5 years of historic documents as this helps to identify any trends in the business. Expect to put together a list of assets for the CVA and obtain current or average inventory levels. Buyers need this information as well to conduct their valuation.
Now the magic happens. There are several different ways to determine the selling price of a business. Using a multiple of earnings is very common, although there are other rules of thumb that can be used as a comparison. Working with a business broker will give you a look at several other methods to calculate a selling or purchase price. Some components of a valuation can be more of an art than a science.
Once a selling price has been decided, then it's important to understand how much tax will be taken off the top. Your CPA and tax attorneys will be able to provide guidance in this area. Talk to a business broker to meet with these professionals. Also, consider professional fees that will come off the purchase price of the deal. After all of these costs are subtracted from the selling price, this is the amount the seller will receive.
The valuation will also be requested by the lender you choose to work with. This is part of the financing criteria. Business brokers have relationships with local bankers and can make the appropriate referrals.
Since the valuation is a big, important part of buying and selling a business, expect the valuation to take a few weeks, and practice patience. You don’t want to undersell your business, but also don’t want it to sit on the market for months with no interest because it is overpriced. The wait for your valuation will be worth it in the end.