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What is a Business Valuation?&nbsp;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 <a data-mce-href="https://www.investopedia.com/terms/a/armslength.asp" href="https://www.investopedia.com/terms/a/armslength.asp">arm’s length transaction</a>. 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.&nbsp;&nbsp;&nbsp;Why Do You Need It?&nbsp;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.&nbsp;&nbsp;&nbsp;Why It’s Important to Have Before You Enter a Sales Process/M&amp;A&nbsp;A valuation is crucial before entering a sales process or mergers and acquisitions (M&amp;A) for several reasons:&nbsp;- 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.&nbsp; - 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.&nbsp; - 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&amp;A, a valuation makes you a more attractive target for potential acquirers who see a clear picture of the value you bring.&nbsp; - 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.&nbsp; - Investor Confidence: If you’re involving investors in the sales or M&amp;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.&nbsp; &nbsp;Broker’s Opinion of Value (BOV) vs. Traditional Valuations&nbsp;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:&nbsp;- 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.&nbsp; - Market Expertise: M&amp;A experts are dialed into the current M&amp;A landscape. They consider recent trends, specific industry outlooks, and potential synergies between companies that formal valuations might miss.&nbsp; - Flexibility and Customization: BOVs can be tailored to your situation. An M&amp;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.&nbsp; - Starting Point for Negotiations: A BOV provides a solid foundation for negotiation, allowing you to showcase your company’s value with real-world M&amp;A insights.&nbsp; &nbsp;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&amp;A process.&nbsp;&nbsp;&nbsp;Timing&nbsp;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.&nbsp;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.&nbsp; What Do We Look At?&nbsp;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. &nbsp; Here is an example of our standard request list: &nbsp;- Three full Years of Profit &amp; 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. &nbsp;Items for discussion: &nbsp;- 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). &nbsp; - Business structure? (LLC, S-CORP, C-CORP, etc.) &nbsp; - Does any customer/relationship account for over 20% of annual revenue? &nbsp; - Are customers and employees under a contract with the company? &nbsp; &nbsp;FinTeam’s BOV Process&nbsp;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:&nbsp;1. Engagement &amp; Confidentiality Agreement 2. Data collection 3. Analysis of company’s financials, operations, industry, competitors &amp; comparable transaction. 4. Meeting with Owner for FinTeam to present report 5. Any update, addition, amendments, etc.&nbsp;

Beyond the Asking Price: Unveiling the Secrets of Business Valuation

This is a general guide for the first steps a business owner should take when first starting their business, specifically for solopreneurs and first-time business owners. The exact steps will depend on the business, legal structure, and owner preferences. We have found the following to be the most efficient / effective when getting set up. By the way, we aren’t compensated for recommending any of the following software :)Our Recommended Technology Stack:- Quickbooks (ERP / Accounting) - Gusto (HR) - Mercury (Banking) 1. Apply for an EIN (Employer Identification Number)- This is effectively your social security number for your business - Link to complete is here: <a data-mce-href="https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-number-ein-online" href="https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-number-ein-online">Apply for an Employer Identification Number (EIN) online | Internal Revenue Service (irs.gov)</a>. - It’s free to file. 2. File for a business credit card- Ideally, use a credit card that uses a “points system” instead of a cash back system. A cash back card will reduce your business expenses (thereby increasing your taxable income), while a points card will allow you to take personal trips without recording the benefit generated from those to the IRS. - Our team uses the <a data-mce-href="https://www.americanexpress.com/us/credit-cards/business/business-credit-cards/american-express-blue-business-plus-credit-card-amex/" href="https://www.americanexpress.com/us/credit-cards/business/business-credit-cards/american-express-blue-business-plus-credit-card-amex/">American Express Blue Business Plus credit card</a>. Others, such as Chase Saphire, are solid for those who travel for business. - Use your EIN when applying. 3. Apply with your state’s Secretary of State office- For the state of North Carolina: <a data-mce-href="https://www.sosnc.gov/divisions/business_registration" href="https://www.sosnc.gov/divisions/business_registration">North Carolina Secretary of State Business Registration Business Registration (sosnc.gov)</a> - Submit Articles of Organization, which are $125. The application process will take you through this. - Use your new business credit card to pay for this expense. - Optional: Operating Agreement. If you’re running the business by yourself, you don’t have to have one. It will come in extremely handy if you have business partners now or plan on having them in the future. 4. Set up a business bank account- It’s critical to keep you personal and business finances separate. As such, I’d advise using a completely separate bank for your business. - Consider whether the bank is totally virtual, what financial products they have to offer, how good / easy their software / platform is, etc. I use and recommend Mercury. 5. Set up an Enterprise Resource Planning (Accounting System)-Quickbooks is what most small businesses use. You will probably want the Solopreneur, Simple Start, or Essentials package. - Link your business credit cards and bank accounts to Quickbooks via Menu -&gt; Transactions -&gt; Bank Transactions. That way all of your transactions on those platforms will flow into Quickbooks automatically. - Set up your Chart of Accounts in Quickbooks. A Chart of Accounts is effectively the “buckets” you use to categorize revenue, expenses, assets, liabilities, etc. - You can also automate your expenses. Quickbooks has “rules” that will allow you to put certain expenses in certain buckets for you <a data-mce-href="https://quickbooks.intuit.com/learn-support/en-us/help-article/banking/set-bank-rules-categorize-online-banking-online/L0mjJl0nD_US_en_US" href="https://quickbooks.intuit.com/learn-support/en-us/help-article/banking/set-bank-rules-categorize-online-banking-online/L0mjJl0nD_US_en_US">automatically</a>. For example, if you have a monthly adobe subscription, you can tell Quickbooks to put all “Adobe” expenses into your “Software” expense bucket. - You will be able to do a lot with Quickbooks, including having specific vendors, customers, inventory items, service offerings, and more on the platform. As a financial advisor, it gives us a ton of visibility, as we know exactly how you make money, who you make it from, where you spend it, and how you can optimize your profitability / cash flow. - Costs are <a data-mce-href="https://quickbooks.intuit.com/r/whats-new/pricing-and-subscription-levels-for-quickbooks-online/" href="https://quickbooks.intuit.com/r/whats-new/pricing-and-subscription-levels-for-quickbooks-online/">here</a>. They frequently run specials, plus accountants &nbsp;(like FinTeam) can get you 30% off for 12 months. 6. Set up HR platform (optional)- If you have 1099 contractors you regularly use, have employees, or are an S-Corp or C-Corp, it’s recommended to have an HR platform, such as Gusto. - If you’re a solopreneur running the LLC as a pass-through entity, you’ll pay yourself via <a data-mce-href="https://pursuitlending.com/resources/what-are-distributions-how-to-pay-yourself-as-a-business-owner/#:~:text=Distributions%20are%20a%20payout%20of,a%20business%20owner%20is%20taxed." href="https://pursuitlending.com/resources/what-are-distributions-how-to-pay-yourself-as-a-business-owner/#:~:text=Distributions%20are%20a%20payout%20of,a%20business%20owner%20is%20taxed.">distributions</a> – from a tax perspective, all of your business’s taxable income (regardless of whether you pay yourself all of it) is what you owe for taxes (this is oversimplified, but it’s so you get the point). Thus, the additional overhead of an HR platform may not be required. - If you’re an S-Corp, C-Corp, or have employees, you should set up a formalized payroll system to withhold taxes, benefits, deductions, etc. - Gusto pricing is <a data-mce-href="https://gusto.com/product/compare" href="https://gusto.com/product/compare">here</a>. Accountants (like FinTeam) can get you a 20% discount. &nbsp; 7. Let it rip- Start kicking butt, taking names, and generating some serious cash flow. - On a periodic basis (monthly is recommended) go in and check in on your finances, software, and integrations to make sure everything is flowing through correctly. During this time, I’ll run payroll, do distributions, make credit card payments, categorize transactions, reconcile my books, and other finance related tasks. - After this, you’ll have to start setting up <a data-mce-href="https://www.thehartford.com/small-business-insurance/what-insurance-do-you-need-for-small-business" href="https://www.thehartford.com/small-business-insurance/what-insurance-do-you-need-for-small-business">insurance</a>, <a data-mce-href="https://www.nerdwallet.com/article/taxes/estimated-quarterly-taxes" href="https://www.nerdwallet.com/article/taxes/estimated-quarterly-taxes">estimated tax payments</a>, <a data-mce-href="https://www.creativebloq.com/buying-guides/the-best-website-builder-for-small-business" href="https://www.creativebloq.com/buying-guides/the-best-website-builder-for-small-business">website</a>, and some other <a data-mce-href="https://www.stealthofficeservices.co.uk/blog/16-admin-tasks" href="https://www.stealthofficeservices.co.uk/blog/16-admin-tasks" data-mce-selected="inline-boundary">admin-related</a> items

Small Business Launch Guide

Selling a business that you have poured your blood, sweat, and tears into is an emotional and stressful event. Expert guidance is a vital component to a successful exit, but what about maximizing value? Business brokers are fantastic at managing the actual process, but there is only so much they can do after you engage them. A company’s shortcomings will have a direct impact on its valuation, which is a harsh reality to prospective sellers. &nbsp; So, what then should the timing look like? When evaluating a business, the prior three years are most important, with the most recent 12 months being critical. Managing cash flow, balance sheet liabilities, and profitability are items that require significant attention. While financials are the focal point, operations, personnel, internal processes &amp; procedures, customer concentration, and market conditional all play a part. Any business brokers will instruct you to “not take your foot off the pedal” during the M&amp;A process, but that is a principle that should be taken to heart years prior to the exit. Especially for business owners looking forward to retirement, we often see that growth has either slowed or is now decreasing. To prospective buyers, stagnant growth is a yellow flag and declining growth is a red flag, resulting in lower valuations. &nbsp; At FinTeam, we partner with business owners who understand that maximizing their exit potential requires ample time to strategize and prepare. We utilize our M&amp;A backgrounds to analyze every aspect of a company (just like we would an acquisition target), create a gameplan of areas in need of attention, and then put our fractional CFO hat on and go to work. This holistic approach of evaluating a company from multiple different perspectives provides us with the insights necessary to implement change that directly translates to increased exit potential for the seller. &nbsp; With FinTeam’s Broker’s Opinion of Value (BOV) reports, we are able to track the estimated selling price of a company at various intervals. This provides us not only the ability to value a business, but also track the impact of changes and improvements over time.&nbsp; If you are interested in seeing what your business is worth, send as an email at Deals@thefinteam.com&nbsp;

The Timing of Selling Your Business: From a CFOs Perspective

a close up of a clock on a piece of paper

<h2>Understand Your Cash Flow</h2>Cash flow is the lifeblood of any small business. You need to know how much money is coming in and going out. Track your income and expenses regularly. This will help you avoid surprises and plan for the future.Use tools like accounting software to keep your records up to date. This software can automate many tasks and provide real-time insights.<figure id="figure-4ufkd1sl8aly4x3nyw"><img id="4ufkd1sl8aly4x3nyw" src="https://images.unsplash.com/photo-1526304640581-d334cdbbf45e?crop=entropy&amp;cs=tinysrgb&amp;fit=max&amp;fm=jpg&amp;ixid=M3wyNjI5NjF8MHwxfHNlYXJjaHwyN3x8Y2FzaCUyMGZsb3d8ZW58MHx8fHwxNzE5ODk1MTYzfDA&amp;ixlib=rb-4.0.3&amp;q=80&amp;w=1080" alt="cash flow" class="object-cover bg-gray-100 rounded-lg md:rounded-xl lg:rounded-2xl" style="aspect-ratio: 16/9;" data-mce-src="https://images.unsplash.com/photo-1526304640581-d334cdbbf45e?crop=entropy&amp;cs=tinysrgb&amp;fit=max&amp;fm=jpg&amp;ixid=M3wyNjI5NjF8MHwxfHNlYXJjaHwyN3x8Y2FzaCUyMGZsb3d8ZW58MHx8fHwxNzE5ODk1MTYzfDA&amp;ixlib=rb-4.0.3&amp;q=80&amp;w=1080" data-mce-style="aspect-ratio: 16/9;"></figure>cash flow. Look for trends and identify any potential issues early. This proactive approach can save you a lot of headaches down the line.<h2>Create a Budget</h2>A budget is a financial plan for your business. It helps you allocate resources and set financial goals. Start by listing all your income sources and expenses. Be realistic and include both fixed and variable costs.Once you have a budget, stick to it. Regularly compare your actual spending to your budget. This will help you stay on track and make adjustments as needed.<figure id="figure-q37eh2x68ly4x3pg3"><img id="q37eh2x68ly4x3pg3" src="https://images.unsplash.com/photo-1484480974693-6ca0a78fb36b?crop=entropy&amp;cs=tinysrgb&amp;fit=max&amp;fm=jpg&amp;ixid=M3wyNjI5NjF8MHwxfHNlYXJjaHwxM3x8YnVkZ2V0JTIwcGxhbm5pbmd8ZW58MHx8fHwxNzE5ODk0ODU4fDA&amp;ixlib=rb-4.0.3&amp;q=80&amp;w=1080" alt="budget planning" class="object-cover bg-gray-100 rounded-lg md:rounded-xl lg:rounded-2xl" style="aspect-ratio: 16/9;" data-mce-src="https://images.unsplash.com/photo-1484480974693-6ca0a78fb36b?crop=entropy&amp;cs=tinysrgb&amp;fit=max&amp;fm=jpg&amp;ixid=M3wyNjI5NjF8MHwxfHNlYXJjaHwxM3x8YnVkZ2V0JTIwcGxhbm5pbmd8ZW58MHx8fHwxNzE5ODk0ODU4fDA&amp;ixlib=rb-4.0.3&amp;q=80&amp;w=1080" data-mce-style="aspect-ratio: 16/9;"></figure>regularly to reflect changes in your business. This will keep your financial plan relevant and effective.<h2>Manage Debt Wisely</h2>Debt can be a useful tool for growing your business. However, it must be managed carefully. Only take on debt that you can afford to repay. Understand the terms and conditions of any loans or credit you use.Keep track of your debt levels and make payments on time. This will help you maintain a good credit score and avoid costly penalties.<figure id="figure-s2ie9mvihjly4x3r0q"><img id="s2ie9mvihjly4x3r0q" src="https://images.unsplash.com/photo-1434030216411-0b793f4b4173?crop=entropy&amp;cs=tinysrgb&amp;fit=max&amp;fm=jpg&amp;ixid=M3wyNjI5NjF8MHwxfHNlYXJjaHwyMHx8ZGVidCUyMG1hbmFnZW1lbnR8ZW58MHx8fHwxNzE5OTU1NTExfDA&amp;ixlib=rb-4.0.3&amp;q=80&amp;w=1080" alt="debt management" class="object-cover bg-gray-100 rounded-lg md:rounded-xl lg:rounded-2xl" style="aspect-ratio: 16/9;" data-mce-src="https://images.unsplash.com/photo-1434030216411-0b793f4b4173?crop=entropy&amp;cs=tinysrgb&amp;fit=max&amp;fm=jpg&amp;ixid=M3wyNjI5NjF8MHwxfHNlYXJjaHwyMHx8ZGVidCUyMG1hbmFnZW1lbnR8ZW58MHx8fHwxNzE5OTU1NTExfDA&amp;ixlib=rb-4.0.3&amp;q=80&amp;w=1080" data-mce-style="aspect-ratio: 16/9;"></figure><h2>Plan for Taxes</h2>Taxes are a significant expense for any business. Plan for them throughout the year to avoid a large bill at tax time. Keep accurate records of your income and expenses. This will make it easier to prepare your tax return and take advantage of any deductions.Consider working with a tax professional. They can help you understand your obligations and ensure you comply with all regulations.Set aside money each month to cover your tax bill. This will help you avoid cash flow problems when taxes are due.<h2>Build an Emergency Fund</h2>An emergency fund is essential for any small business. It provides a financial cushion in case of unexpected expenses or a downturn in business. Aim to save enough to cover at least three to six months of operating expenses.Start small and build your fund over time. Set aside a portion of your profits each month. This will help you build a reserve without impacting your day-to-day operations.Having an emergency fund can give you peace of mind and help you navigate challenging times more easily.

The Blog

Beyond the Asking Price: Unveiling the Secrets of Busines...

Small Business Launch Guide

The Timing of Selling Your Business: From a CFOs Perspective

Top Financial Management Tips for Small Businesses