1. How do I determine the Fair Market Value of my business?
The best way to determine the true Fair Market Value of your business is with a professionally prepared, independent, third-party appraisal. For most business sale situations, the Fair Market Value Analysis type of report is appropriate.
2. Are there different types of valuations for different purposes?
There are three general types of valuation appraisals: Fair Market Value Analysis, Opinion of Value Letter, and Certified Valuation for IRS Revenue Ruling 59-60.
- The Fair Market Value Analysis is a limited scope comprehensive analysis that takes into consideration all determinants of value including the asset base, the earnings, and market comparable sales.
It is appropriate for valuing and pricing a business for sale, for partner buy-sell agreements, lender analysis and estate planning. The result is a full 40-page report detailing the analysis and conclusions. The purpose of the report is to indicate the Fair Market Value of an ongoing business operation. It is used with buyers and/or lenders in the sale or financing of the business.
- The Opinion of Value Letter is a limited analysis that focuses on the earnings of the last two years. Industry standard earnings multipliers are applied to arrive at a broad range of potential value. The result is a one to two page letter that reports this general range. This approach is usually only appropriate for the smallest of businesses.
- The Certified Valuation is a certified formal comprehensive appraisal to satisfy the requirements of the IRS Revenue Ruling 50-60. The process is similar to a full accounting audit. It is appropriate for situations involving litigation such as divorce settlements, and tax cases. The purpose of the report is to be used as testimony in court cases.
3. What is included in the Fair Market Value Analysis?
The Fair Market Value Analysis is a limited scope,
formal valuation intended for the standard small business with sales up to $20,000,000.
The report is approximately 45 pages and provides a detailed review of all aspects that are considered in determining the final valuation conclusion.
The bulk of the report is financial analysis and the valuation conclusion is supported in detail. In addition to the discretionary earnings of the company, the Balance Sheet is also a component of the analysis.
Nine methods are considered in
three main valuation approaches, including
asset/cost, income and market comparable based valuation approaches.
Depending on the facts and circumstances of a particular analysis, application of one or more of these methods may be more appropriate than another. The
approaches used are assigned confidence levels depending on the appraiser's judgment, the type of assets in question, the historical and prospective cash flow generating capacity of the business, as well as the quality and quantity of available financial, operational and industry data.
The report contains the following (partial list of contents):
- Indicated value of the business based on multiple valuation methodologies.
- Allocation of indicated value between tangible and intangible assets.
- Recommended financial structure for the deal to optimize price.
- Justification of purchase, to test the reasonableness of the indicated value.
- Financing analysis if appropriate.
- Historical financial statements.
- Detailed description of each valuation approach considered and used.
4. Who is truly qualified to conduct the appraisal for my business?
Professional business valuation is a very specific skill that requires considerable training, expertise and recent experience. Most local accountants are not qualified in this specialized area. It is usually best to use a professional level firm that does nothing but business valuation, and does hundreds of them every year.
Another important aspect is that the appraisal should be conducted by an independent third party. Even if your accountant is qualified in business appraisal, he still doesn't have an "arm's length relationship" with the business. Through our sister company,
Merrimack Business Appraisers, we offer comprehensive formal appraisals as well as restricted use appraisals for all of your business valuation needs including: transfer of ownership, dispute resolution (shareholder and divorce), and tax matters (gift, estate, impairment and capital gains).
One of the first questions people usually ask is "How did you come up with that price?" If the answer is "My accountant, friend or broker came up with it," then buyers and lenders usually will not accept it.
If the answer is "I have an independent third-party appraisal conducted by a national firm that specializes in valuing business like mine," then the valuation is accepted.
5. Why can't I rely on "rules-of-thumb" from my accountant or friends?
Rules of thumb, such as "businesses in this industry sell for one times sales," or "businesses in that industry sell for two times earnings," represent a dangerous way to determine the fair market value.
These rules of thumb are usually averages based in data points across a wide range.
The rule represents a mid-point among many businesses. No two businesses are alike. Your business could be either well above or below that mid-point. If your company is above that point, the business will be under priced and you will be leaving a lot of money on the table. If it is below the data mid-point, your business will be over priced and most likely not sell.
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Selling your business isn't something you do every day. Don't you owe it to yourself to have a professional business broker guide you through what could be the most important transaction of your life?
Call Lou Pereira today at 603.890.6628 or contact us directly via e-mail.
