Determining the value of a business is a complex process that requires professional expertise. As an experienced business appraiser, I am often asked – why not just estimate the business value yourself or use an online valuation calculator? While self-valuation may seem straightforward, there are many factors to consider and pitfalls to avoid. Engaging a qualified business appraiser is the best way to obtain an accurate, reliable business valuation.
The Importance of an Accurate Valuation
An accurate valuation is crucial whether you are buying, selling, raising capital, estate planning, litigation support, or for shareholder disputes. The financial and legal implications of overvaluing or undervaluing a business are significant. Even small businesses are worth hundreds of thousands or millions of dollars. Would you trust an informal guess for such a substantial asset?
As an accredited appraiser, I adhere to established standards and methodologies to produce a fair market valuation that will withstand scrutiny from investors, shareholders, courts, and the IRS. An experienced appraiser considers the specifics of your business and industry to tell the story of your company’s real worth.
Complex Factors Appraisers Assess
Business appraisers do more than crunch numbers. We perform an in-depth qualitative and quantitative analysis of all drivers of value. Some of the many factors we consider include:
Financial Performance & Position
- Trends and ratios based on historical financial statements
- Projected performance based on management forecasts
- Working capital, capital expenditures, debt/equity structure
- Impact of one-time or non-operating items
Assets & Liabilities
- Book value vs. fair market value of assets
- Identification of underutilized or redundant assets
- Analysis of warranties, product/service liabilities
- Assessment of unrecorded assets like brand value or intellectual property
Market Conditions
- Macroeconomic climate
- Industry outlook, growth potential and barriers to entry
- Competitor landscape and position within the market
- Customer demographics, retention rates and buying power
Business Operations
- Depth of management team and key person dependence
- Employee productivity, retention, wages and relations
- Supply chain analysis, production efficiency and scalability
- Business processes, systems, IT infrastructure
Legal Structure & Agreements
- Impact of shareholder or partnership agreements
- Corporate legal structure, ownership breakdown and rights
- Review of major contracts, leases, insurance, lending agreements
This is not an exhaustive list. Even for simpler businesses, there are dozens of quantitative and qualitative factors that affect value. Identifying and weighing these variables requires financial modeling skills and real world experience.
Valuation Methods & International Standards
Business appraisers utilize internationally accepted valuation approaches and methods:
- Asset Approach – Calculates the business’s underlying net asset value
- Market Approach – Establishes value based on comparison to similar sold businesses
- Income Approach – Estimates fair value based on projected future income streams
Within each approach, there are many recognized methods and techniques. For example, the Income Approach may use discounted cash flow analysis, excess earnings, capitalization of earnings, relief from royalty, or other methods. Appraisers look at a business from multiple perspectives to determine the best estimate of value.
As a designated appraiser, I adhere to industry standards such as IBA’s International Valuation Standards and ABV’s Business Valuation Standards. These guidelines ensure analyses and reports meet quality benchmarks for content, disclosures, objectivity and independence. Adhering to a standard methodology improves accuracy and minimizes scrutiny of the results.
Real-Life Example
I recently valued a 25-year old manufacturing business that was being transferred to a family member. The company produced industrial pumps worth around $5 million in annual revenue. At first glance, a reasonable valuation multiple would be 1x revenue, estimating the business value at $5 million.
However, after an extensive analysis, I determined the business was worth $3.2 million. Why such a large difference? Here are some of the factors identified during the engagement:
- Revenues heavily reliant on one long-term client who recently signed with a competitor
- Operational equipment nearing end of useful life
- Underperforming management team with high turnover
- Supply costs rising faster than the product price
- Market shifting toward higher efficiency pump solutions
An informal valuation would have grossly overstated the business’s worth. This example demonstrates the need for an experienced appraiser to provide a valuation that tells the full business story.
Partner With an Experienced Appraiser
Determining your business’s fair market value requires an objective expert appraiser, not a casual estimate or online calculator.
At Arrowfish, our appraisers have extensive training in valuation methodologies and standards. We are skilled at analyzing private businesses across all industries to produce accurate, well-supported valuations. Our in-depth evaluations provide critical insights into your company’s financial health, strengths, weaknesses, and future outlook.
Whether you are preparing to sell your business, resolve a shareholder dispute, navigate a divorce, or plan your estate, the financial and legal stakes are high. Avoid risk and partner with our highly qualified business appraisers to determine your business’s fair market value.
With over 50 years of collective experience, Arrowfish Consulting’s accredited appraisers have performed hundreds of valuations for private companies, from small family businesses to firms with over $50 million in revenue. We are skilled in applying income, market and asset approaches to determine value. Our valuations adhere to industry standards for quality and objectivity.
Please contact Arrowfish Consulting, the most trusted business appraisal firm in Utah, to schedule a consultation and discuss your valuation needs. We look forward to helping you move forward with confidence based on a valuation you can stand behind.