Financial data – what is needed?
As a general rule, the more financial data that is available, the better. If your accounting system is sophisticated enough to produce internal balance sheets and profit and loss statements, they are certainly useful. Of course, the best information to use as a base is the Federal Tax Return, because by the time they are submitted to the IRS, any and all final adjustments have been made. Also, three to five year returns will give the valuation analyst a better and more consistent track record of the company’s history. For more information and/or questions, lean on the appraiser for guidance. Typically, the most important source of needed data is the owner or CEO (or CFO if a company is large enough to support that position), who is usually very familiar with the “financial goings-on” and the specific applicable history.
Current debt: a factor?
In the context of assigning a value to a business to be sold, while debt is certainly important, it is generally not something that has a direct bearing on the value of the business. This is why. When long-term debt (any debt carried on the books for more than a year) is to be considered, that debt is typically handled by the seller out of the proceeds of the sale. If it turns out as part of the agreement that the buyer will assume a specified amount of the owner’s long-term debt, that arrangement is usually a part of the purchase-sale agreement prepared by the attorneys and accountants on one or both sides.
How much should an appraisal cost?
The fee or service charge for a business valuation/appraisal will vary based on a number of factors. It can cost anywhere from a few hundred dollars for a simple “out of the box” software program to, in some cases, tens of thousands of dollars. . . in case the project involves a medium or larger company ($10K or more in sales), and if a major accounting or valuation firm is ordered. But for most smaller businesses, with sales of, say, $500M to $10K, and an experienced appraisal professional serving you who does nothing more than process appraisals, the service fee should be in the range from $3,500 to $7,500, depending on size. of your company and the amount of work to authorize. (In some cases, the extras amount to the valuation of several different years, several different divisions of the same company, 5-year averages, proforma valuations, etc. A proforma valuation is a valuation based on projections of expected results) When A carefully selected, verified, veteran approach can produce accurate, worthwhile valuations. Which brings us to our next focal point. Select an appraisal professional or specialist to do the work of this very important service.
How to select an appraisal service
A story that happened several years ago comes to mind. When asked who would do the required valuation, the client replied, “I have a great accountant who will take care of that for me.” It was then suggested that the client check how many companies the accountant typically values over the course of a year. He later learned that the aforementioned accountant had valued a company about 18 months ago. Needless to say, the client decided to go with another firm that had more significant and current valuation experience. And please don’t misunderstand my intent, as this is not a hit on counters. Most of those with whom we are familiar do competent and professional work in accounting and some even have respectable valuation experience and activity. This accountant simply had no substantive valuation experience. The following checklist will help with the selection process.
Appraisal Firms/Professionals Checklist
o Time of validity of the “system” of the appraiser to be used
o Printed literature and/or data sheets describing the process to be used
o Variety and size of companies valued in the past
o Frequency of evaluation projects
o How the final numbers can be verified
o Are comparables from other similar companies provided?
o Lists of previous clients as references
o Testimonial letters from previous valuation clients
o Articles published on business valuation/appraisal
o Ability to provide expert testimony in court if needed
Please note that the list above does not include certification as a selection criteria. Certification from one of the major business valuation associations is a good badge, but it does not guarantee that the final numbers produced will be more accurate or realistic than those produced by a non-certified valuation professional. The key here is history, history, history! Also, the price you pay for a valuation is not a sure indicator of the accuracy of the results. A few years ago, a major business magazine published an article featuring a valuation “expert” detailing the valuation task of a particular “service” company. As the article concluded, this valuation analyst cited the client’s business as worth 15 to 22 to 61 times earnings. In fact. 61 times the earnings? (A copy of the article is available upon request) And the lesson here? A great company and a great rate don’t necessarily buy a bulletproof valuation.
In the words of a client who was kind enough to send us a letter after the sale of his 25% ownership in a retail furniture store. . . . “I sold my part of the business, which came to a figure resulting from his analysis and I am satisfied that it was a fair price for the time.” What more can be said! ***
Aids to help sellers
There are two aids available to help homeowners who are thinking of selling. The “Ten Commandments of the Seller” is a list of guidelines that will help the owner to prepare their business for sale and at the best possible price. The “Debt Service Worksheet” is a how-to sheet for learning how mechanical down payment and finance balance interact when a seller plans to offer owner financing. Both are available free of charge by writing Halas & Associates, 425 Roselawn Place, Charlotte, NC., or by email: [email protected].