Do I Need an Appraisal to Determine the Value of My Business?
- Author Todd Walker
- Published August 15, 2011
- Word count 440
Often, clients ask us the following:
"I would like to sell my business, but I’m not sure what it’s worth. How can I get an idea of the market value? Is it worth getting the company appraised?
Your business is worth what a buyer is willing to pay. Most often it is not necessary to pay for an appraisal for your business. Even though many brokers and merger advisors sell appraisals, these potentially expensive documents don't determine what a buyer will pay for your business. Buyers will use their own analysis to figure out what your business is worth to them. They will most likely not even consider any paid appraisal you might have, because it does not consider all the factors that are pertinent to them.
There are rare occasions when an appraisal will be useful, but these are primarily in situations where the buyer and seller are not at arm's length, such as divorce, partnership dissolution, shareholder disputes, etc.
Potential buyers will consider a variety of factors in their estimation of the value, including
-
What will the debt service be on the business?
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What additional costs will they be required to pay to operate the business, including their salary or other management salaries.
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Does the risk profile of the business make it more or less valuable?Are there supplier problems, cash flow issues, or heavy customer concentrations?
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Will they receive a respectable return on they cash down payment over a reasonable length of time? Will this be better than the return of the current mutual fund portfolio market?
If you’re not sure if there is enough value in the company for you to consider selling, you can estimate a potential value range of your company with the following:
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Calculate the real (not tax) profit that your business creates.
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Add back personal expenses that are rolled into business expenses and unusual expenses that a buyer won't incur. This is the "adjusted cash flow."
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Determine how attractive your business is: is it growing, declining, part of a hot industry, an unattractive industry, etc.? Most buyers won't pay for future growth of a company - your company's value is only as good as its past performance.
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Is credit available from commercial banks or other sources?
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Multiply the true cash flow by a factor of 2 to 8 depending on where your answers to 3 and 4.
Merger Advisor Network professionals can assist you in estimating the value of your business. Our advisors will provide this and give you advice on how to best prepare your business for sale, and when to consider the best time to place your business on the market.
Contact us for more information on determining the value of your business, or if you have a Business for Sale Los Angeles.
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