Whether you are a business owner contemplating the sale of your business, raising bank capital or investor equity, pursuing a legal claim, preparing your succession, planning an array of accounting and IRS-related reporting events, or need a Business Valuation – you will want to obtain a valuation report. People sometimes ask how to value a small business for sale, and the best way is to get a business valuation report.

A business valuation report will:

Inform the list price and provide the fair market value of your business if you’re selling

Deliver the credible and reliable value of your business if buying out a shareholder

Provide the value of your shares, as reported to the IRS, if gifting to a family or friend

Add valuable credibility during negotiations or legal proceedings

 

Business Valuation Methods

We use many different valuation methods based on industry, report type, and the purpose of the Valuation Report. The methods listed below are typical for businesses with less than $10MM in gross sales. These are the most widely accepted methods and will provide accurate results. 

The Industry Buyer Method is heavily weighted in the asset’s adjusted book value. This buyer will be in your industry and could be a competitor. They know the business and will pay little in goodwill. Their offering is usually lower because they mainly buy your customer list and equipment at market replacement value. There are exceptions when the purchase is made for strategic reasons, which may get a much higher price.

The Basic Method is the fair value of assets plus 1 to 2 years of discretionary earnings. This method puts much of the value in assets the company holds but does factor in earnings. Documentation is essential to get the valuation your company deserves. Little or no documentation will result in a low offer or no offer.

The Discretionary Earnings Method considers transaction financing, salary potential, and returns on invested capital. This method is focused on what the new owner can earn and puts less emphasis on equipment and assets. Discretionary earnings are the ultimate filter for how healthy a business is. A company can have a lot of assets and make little or no money. The assets can be valuable but underperforming, and financial liability if the earnings aren’t there.

The Comparable Sales Method is derived from combining sales data from hundreds of completed transactions in similar companies. This method is straightforward, but small businesses tend to be so unique that it leaves much to interpretation. The potential earnings of small companies vary greatly depending on the owner and his or her capabilities.

The Cost-to-Replace Method is what it would cost to build a similar business from scratch. This method is useful, but you want to maximize “goodwill” or intangible things like future earnings as a seller. If your company is well positioned to increase earnings in the future, the cost-to-replace method will undervalue your business.

The Debt Capacity Method obtains debt service by deducting owner salary, depreciation, replacement reserves, and ROI on invested capital. What is left over is used for debt service. The debt capacity method is used in small businesses with revenues exceeding $2.5 million. It is helpful when another company is acquiring your company for strictly financial reasons.

 

Business Valuation Reports

Business valuation reports can be prepared for many different purposes. There are two main types: informational valuations (broker opinion of value reports) and certified valuations. An information valuation is an internal document for the company’s owners and stakeholders. A certified valuation report is used when the conclusions may be used in a legal proceeding or when findings are likely to be challenged. It is also used by outside parties to determine the subject company’s value. Here are the common uses of Business Valuation Reports:

• Mergers and Acquisitions
• Selling a business
• Buy/Sell Agreements
• Business Planning
• Partner buy-in/buy-outs
• Retirement/Succession Planning
• Employee Benefit Plans

 

Informational Reports

The Informational Valuation Report is a streamlined solution for businesses seeking insightful analyses at a cost-effective rate. It is built around a company’s true value and is usually 20 to 30 pages long and written in plain English so it can easily be understood. It is an actionable document designed to support various business needs, from establishing market prices to informing internal business decisions. 

 

It’s designed for individuals requiring comprehensive analysis without a certified valuation. Our reports offer a balanced approach, utilizing more streamlined procedures and reporting methodologies. Experienced financial analysts prepare the report, ensuring accuracy and reliability in every detail. Get informative reports that can inform your decision-making process.

 

Essentials Informational Valuation Report:

This is the most cost-effective report. It includes a valuation summary based on market and asset approaches. It uses sales and seller discretionary earnings (SDE) multiples. It is appropriate for businesses with up to two million dollars in gross sales. This report is approximately 20 pages long and takes about a week to complete after receiving all information. Click the download button below to see a sample report.

Standard Informational Valuation Report:

This report includes everything from the Essential Information Report plus EBITDA multiples, capitalization of the cashflow method, multi-stage growth method, financials, and industry benchmarking ratios. It uses specific industry data, owner’s compensation analysis, state tax verification, and financial confidence checks. This report is about 35 pages long and can be done in about two weeks after receiving all the required information. Click the download button below to see a sample report.

Certified Business Valuation Reports

Certified Reports are done by an accredited business appraiser. Each report includes an in-depth written analysis covering the company’s nature and history, industry trends, economic factors, and comprehensive financial analysis. They’re used when scrutiny over value is anticipated or detailed support and explanation of the valuation are required. The Certified Reports provide thorough insights and conclusions regarding the company’s worth. The Certified Business Valuation Report takes about four weeks after receiving all information regarding the subject company. The common uses of Certified Business Valuation Reports are:

• • Gift/Estate planning
  • Employee benefit plans
  • Litigation
  • Partner dispute resolution
  • Bank loans
  • Divorces

The Certified Business Valuation Report is 65+ pages and includes an executive summary and more analysis of the company’s history, industry, economy, and financials. It can be used to substantiate company information to third parties for acquisitions, divestitures, IRS submissions, partner disputes, and bank loan reports.   Click the download button below to see a sample report.

 

When Do You Need a Valuation Report?

A business valuation report is needed when you need to make a decision dependent on a company’s value. Here are some situations where you need a business valuation report:

1. Selling or Buying a Business: A valuation report objectively assesses a business’s worth whether you’re considering selling or buying one. It helps both parties negotiate a fair price based on the company’s assets, income, and market conditions.

2. Mergers and Acquisitions: In merger or acquisition deals, both parties need to know the businesses’ value to determine fair exchange ratios and negotiate terms effectively.

3. Seeking Investment or Financing: Investors and lenders often require a valuation report to assess the risk and potential return on investment. It helps them determine the business is worth investing in and at what valuation.

4. Tax Purposes: Valuation reports are essential for tax planning, especially for estate and gift taxes, partnership buyouts, and situations involving a change in ownership structure.

5. Litigation and Dispute Resolution: Valuation reports serve as evidence in legal proceedings such as shareholder disputes, divorce settlements, or bankruptcy cases where the value of the business is contentious.

6. Financial Reporting: Companies may require valuation reports for financial reporting purposes, such as complying with accounting standards or conducting asset impairment tests.

7. Strategic Planning: Understanding the value of your business helps in strategic decision-making, such as expansion plans, entering new markets, or restructuring initiatives.

8. Employee Stock Ownership Plans (ESOPs): Valuation reports are necessary for establishing the value of shares held by employees in ESOPs, ensuring fair compensation and compliance with regulatory requirements.

A business valuation report provides clarity and transparency regarding a company’s financial standing and potential, making it indispensable in various business dealings and strategic decisions. Schedule a free call to determine if you need a business valuation report.