Beyond the Asking Price: Unveiling the Secrets of Business Valuation

What is a Business Valuation? 

Business valuation is the process of determining the fair market value of a company. It takes your financials and estimates what a buyer would pay to a seller in an arm’s length transaction. It goes beyond the book value of assets and considers a company’s future earning potential, its competitive advantages, and the health of the industry. The report plays a crucial role in various situations, such as mergers and acquisitions, estate planning, and, most importantly, for small business owners looking to sell their company. By understanding a business’s true worth, you can set a realistic asking price, negotiate confidently with potential buyers, and ultimately maximize profit on exit/acquisition. 

Why Do You Need It? 

Imagine you’re at a garage sale, but instead of dusty lamps, you’re selling your awesome business. You know it’s valuable, but how valuable? That’s where a valuation comes in. It’s like getting a price check on your whole company, so you don’t end up accidentally selling your masterpiece for chump change. A valuation helps you avoid leaving money on the table or scaring off buyers with a head-scratching price. It gives you the confidence to say “hey, this business is a goldmine,” and back it up with facts. So, basically, a valuation is your secret weapon for getting the best bang for your buck when you sell your baby. 

Why It’s Important to Have Before You Enter a Sales Process/M&A 

A valuation is crucial before entering a sales process or mergers and acquisitions (M&A) for several reasons: 

- Informed Negotiation: Knowing your company’s fair market value gives you a strong foundation for negotiation. Whether you’re selling or acquiring, a valuation helps you avoid leaving money on the table by understanding what the other party should be willing to pay or accept. 
- Strategic Decision Making: A valuation helps you assess the potential benefits of a deal. For a seller, it ensures you’re not undervaluing your business. For a buyer, it allows you to evaluate if the target company aligns with your strategic goals at a justifiable price. 
- Attracting Qualified Buyers/Sellers: A credible valuation demonstrates seriousness and professionalism. It attracts qualified buyers in a sale, as they understand your expectations and are more likely to make realistic offers. In M&A, a valuation makes you a more attractive target for potential acquirers who see a clear picture of the value you bring. 
- Risk Mitigation: A valuation helps identify potential risks associated with the deal. By understanding the company’s true value, you can uncover hidden problems or overinflated expectations that could derail the process later. 
- Investor Confidence: If you’re involving investors in the sales or M&A process, a valuation provides them with confidence in your understanding of the company’s worth. This can be critical for securing funding or attracting additional investors. 
 

Broker’s Opinion of Value (BOV) vs. Traditional Valuations 

While both Broker Opinions of Value (BOVs) and formal appraisals offer insights into a business’s worth, BOVs are a strategic tool with some distinct advantages: 

- Speed and Cost-Effectiveness: BOVs are quicker to obtain and substantially cheaper, typically ranging between $1-2k, while a formal valuation averages between $10-15k for a small business. This is ideal if you need a fast estimate to gauge potential market interest or determine a starting point for negotiations. 
- Market Expertise: M&A experts are dialed into the current M&A landscape. They consider recent trends, specific industry outlooks, and potential synergies between companies that formal valuations might miss. 
- Flexibility and Customization: BOVs can be tailored to your situation. An M&A expert can highlight your company’s unique strengths, growth potential, or strategic fit with potential acquirers, aspects that a formal valuation might not capture fully. 
- Starting Point for Negotiations: A BOV provides a solid foundation for negotiation, allowing you to showcase your company’s value with real-world M&A insights. 
 

Formal valuations are still crucial for securing financing or legal purposes in certain situations, but for an initial valuation or strategic decision-making, a BOV can be a valuable and efficient tool. Remember, you can always leverage a BOV to spark buyer interest and then secure a formal valuation later in the M&A process. 

Timing 

While a BOV can be helpful during the official sale of a business, its true value lies in its ability to inform strategic decisions well beforehand. Consider a BOV as a financial compass – the sooner you have it, the better you can navigate your course. Having a BOV early allows you to identify areas that might strengthen your company’s value, like focusing on specific metrics or market trends. This advanced knowledge empowers you to make strategic decisions that can maximize your company’s worth by the time you’re ready to enter a formal sales process. 

We recommend performing an initial BOV 6-12 months prior to exploring a sale (or other transition event), however, we have found that many businesses utilize this tool on an annual basis to track growth and net owner equity. 

What Do We Look At? 

To create an accurate business valuation, financial information is key. This includes historical data like profit and loss statements, balance sheets, and tax returns for several years. Additionally, forecasts and projections for future performance are valuable. But a valuation isn’t just about numbers. Details on the company’s assets, liabilities, key personnel, and intellectual property are also important. Understanding the market and the industry the business operates in helps assess its overall risk and value.  

Here is an example of our standard request list:  

- Three full Years of Profit & Loss Statements and Balance Sheet (2021-2023). 2024 YTD figures would also be helpful 
- Three years of Tax Returns (Schedule C, 1120, etc.) 
- Breakdown of the salary/bonus of all owners for the last three years (and YTD). Please include any discretionary items such as medical/life insurance, personal automobiles, travel, etc.  

Items for discussion:  

- Owners’ involvement and roles that would need to be replaced by the buyer? (This is so I can calculate replacement owner salary[ies] based on the current market).  
- Business structure? (LLC, S-CORP, C-CORP, etc.)  
- Does any customer/relationship account for over 20% of annual revenue?  
- Are customers and employees under a contract with the company?  
 

FinTeam’s BOV Process 

As part of FinTeam’s dedication to serving small businesses, we are happy to offer Broker’s Opinion of Value (BOV) reports as one of our offerings. Understanding the value of your business is not just a step that should be directly prior to an exit, it is a necessity for all small business owners. Our process is as follows: 

1. Engagement & Confidentiality Agreement
2. Data collection
3. Analysis of company’s financials, operations, industry, competitors & comparable transaction.
4. Meeting with Owner for FinTeam to present report
5. Any update, addition, amendments, etc.