As a business owner, you’re likely always looking for ways to grow your company. One method that can help you achieve this is by getting a business valuation. In short, business valuation allows you to determine the current value of your company.
Conducting annual business valuations helps you see where your company stands in the marketplace, identify pain points, and uncover areas for improvement. Even if you’re not ready to sell anytime soon, routine valuations can help you avoid a valuation gap when it does come time to go through the merger & acquisition (M&A) process.
Still, there is a lot of confusion surrounding business valuation services as there are many different types of valuations and appraisals services. Today, you’ll gain a bit of clarity into specific valuation types, the reasons why you may want (or need) one, and what type of valuation specialist should be doing the work.
What Are Business Valuation Services?
A business valuation service is offered by an advisor or appraiser to help business owners determine how much their company, or some part of their company, is worth.
Oftentimes, when people talk about business valuation services they refer to valuing the business as a “going concern.” Going concern is an accounting principle that assumes “any organization will continue to operate its business for the foreseeable future.” Essentially, it means that the business is running as normal and is not closed or on the verge of bankruptcy.
That said, not all business valuation services are the same. When it comes time for a valuation, it is critical for business owners to be clear on:
- What is being valued or appraised
- Why the valuation/appraisal is taking place
- What type of valuation specialist should be doing the work
If owners are not clear about this they will end up with a useless report, wasting valuable time, energy, and money.
What Type of Valuation Do You Need?
When looking for a valuation specialist, you’ll quickly find that there are many business valuation methods. The purpose of the valuation always informs the method, and therefore the skill set you’ll want the valuation service provider to have.
Some valuation analysts do it all while others do not — meaning, some analysts offer all-encompassing valuations, while others specialize in a particular niche. Business owners must be explicit about what they are looking to get out of the valuation. Owners also need to clarify whether the specialist can help them reach their goals.
For instance, if someone wants to value a non-controlling interest in their business — perhaps to sell 10% equity to a manager — it’s vital for the valuation team to know this. If someone needs a valuation for a different purpose — say for litigation support or to prepare for liquidation, bankruptcy, succession planning, the introduction of an employee stock ownership plan (ESOP), estate planning, or a tax audit — it’s necessary to make this known as well.
A quick note about litigation support: If any type of valuation or appraisal is going to be used for litigation (divorce, marital dissolution, partnership dispute, bankruptcy, tax issue, etc.), the owner needs to ask the valuation specialist if they will appear in court as an expert witness to defend their report if necessary. Many will not, or will charge additional fees to do so. Some valuation analysts specialize in certain valuations that end up in litigation.
Below is a breakdown of the various types of valuation services you may come across and who they are best suited for.
Commercial Real Estate Appraisals
During a commercial real estate appraisal, specialists will value real property assets such as land and buildings. The valuation is typically performed by someone who is certified in commercial real estate appraisal.
These appraisals are best suited for those looking to know the value of commercial spaces used by businesses. They usually include land and buildings with offices, warehouses, shops or manufacturing floor spaces, parking lots, and similar assets. These appraisals could be useful if you are looking to buy or sell any real property assets.
Special Purpose Property Appraisals
Also referred to as Real Estate Centered Business Enterprises (RECEs), this type of valuation often requires a commercial real estate appraiser who specializes in a specific RECE.
A RECE is a business enterprise in which much of the value of the business is either tied up in or dependent on the real estate. In other words, it’s difficult to disentangle the business enterprise from the purpose-built real estate, and vice versa.
Examples of RECEs include:
- Car washes
- Bowling alleys
- Funeral homes
- Golf courses
- Senior living facilities
These are noticeably different from commercial real estate appraisals. For instance, an office is a general piece of commercial real estate. While it’s important to the business, the company would be able to go on without it. Employees could work from home and the owner could find a new office space with a bit of research. Compare this to, say, a hotel, where 100% of the company’s revenue depends on the building staying operational.
This type of appraisal is much more straightforward. It is necessary only when you need equipment appraised. You could do so for tax-planning purposes or to prepare for a sale. There are specialists for this (see links below).
Similar to equipment appraisals, this is for when you need inventory appraised. Inventory appraisals could be a necessary component of financial reporting, as they can help you secure lending from banks. The value of inventory can also be an important element of the proceeds you receive from the sale of your business. There are specialists for this type of appraisal as well.
Intellectual Property Valuations
Unlike other appraisals and valuations, which analyze tangible assets, an intellectual property (IP) valuation considers intangible assets. These can be particularly useful to help business owners determine the fair value of their company and IP assets. There are specialists who offer these types of business valuation services.
This is perhaps the most common type of business valuation and is most often offered by business brokers and M&A advisory services. They are appropriate for most small businesses in the lower middle market (those with annual revenues between $5 million and $25 million).
Under a common business valuation, advisors will value the business as a going concern. The purpose is to value it for a third-party buyer who will continue to run the business in the same way as the previous owner (at least initially). These valuations may not be the best option for those going through a restructuring, especially if that restructuring involves moving from a private to a public company or offering stock options to new shareholders.
Instead, the valuation analyst assumes that 100% of the business is going to be acquired by a financial buyer like a private equity group, entrepreneur, or small group of entrepreneurs, which are different from strategic buyers. Trying to determine the strategic value of a business is challenging because it’s entirely dependent on the goals and operating structure of the acquiring company.
Who Offers Business Valuation Services?
You may see business valuation services offered by a number of different professional service firms. These can include:
- Business brokers
- Consulting services
- Certified valuators and analysts
- M&A advisors
Owners need to be crystal-clear about the purpose of the valuation to ensure they work with a business valuation service that is most appropriate for their needs.
What Do Business Valuation Services Include?
Business owners can expect to receive their valuation in a report format. It can be in a very detailed print document, a summary print format, an oral report, or some combination of the three. The format is less important than the information it contains. The report is typically delivered by the valuation specialist, allowing the owner to ask questions and get clarification.
Many valuation services offer annual updates of the report for free or for a small fee. Again, the key is to get good information based on the purpose of the valuation, and how the owner (and others) may need to use it.
How to Find the Right Specialist
As mentioned, it’s essential to work with a specialist who understands your business interests and meets your valuation needs. Consider some of the following resources:
- American Society of Appraisers (ASA)
- National Association of Certified Valuators and Analysts (NACVA)
- Local accounting/CPA firms
- Local law firms
- Business brokerage and M&A advisory firms
- Small business consulting firms
- Google and LinkedIn searches
If your local CPA or law firm does not conduct the valuation themselves, there’s a good chance they know someone in the area who will.
Many owners often wonder whether or not they need to find an industry specialist to value their business. The answer is “maybe.” Most valuation professionals can value lots of different businesses in different industries. The good ones will let an owner know it’s not in their wheelhouse and refer them to someone else. The best way to find a specialist is through an industry association, a Google search, or the NACVA directory.
Owners must do their due diligence and select a specialist who can provide good information based on the purpose of the valuation. Again, it’s worth emphasizing that owners need to be upfront about what they are looking for and the reasoning behind the valuation.
Business Valuations Can Help Your Business in Many Ways
There’s a plethora of specialties and subspecialties in the valuation world, making it crucial for business owners to clearly express what is being valued or appraised, the reason or purpose for the valuation, and what type of valuation specialist should be doing the work. Too often, business owners end up with useless valuation reports because they aren’t clear enough upfront about what they need.
If you’re looking for a business valuation, the team at Allan Taylor & Co. can help you. Our advisors have been in your shoes and can guide you through the entire process, from preparation and planning to finding the right buyer when it comes time to sell. Contact us today to learn more.