Preparing for a Business Valuation in Five Simple Steps

Whether you’re getting ready to retire or planning to add a partner, conducting a business valuation is always momentous. A careful, comprehensive business valuation can help you, a buyer, or another party make any of a wide range of important, informed decisions.

Most business valuations proceed smoothly, and this is particularly true of those where the owner in question is prepared to help move things along. Work through the following five simple steps and your business valuation should conclude without trouble.

  1. Prepare Yourself for the Process

Regardless of whether you inherited it, bought it, or grew it from the ground up, you almost certainly have deep, proprietary feelings about your business. A reliable valuation is supposed to cut through the cruft and present a clear, dispassionate picture of a business’s true worth.

Since you will play an important role in the process of assessing your business, you will need to put your personal feelings aside as much as possible. That will help you contribute productively at every stage and improve the quality of the resulting valuation.

Business owners who become emotionally involved with valuation work often make costly mistakes. A bit of exaggeration can scuttle a sale or even subject you to legal liability later on. An owner will sometimes even overcompensate for personal feelings in ways that unnecessarily diminish a valuation.

Think of your upcoming valuation as another aspect of business where objectivity and discipline will pay off. Leveraging some of the same skills that helped you succeed as a business owner can make the valuation process easier.

  1. Gather Your Existing Records

The bulk of the work associated with any business valuation involves going through documents you should already have on hand. Gather these up before getting started and you will have a strong foundation to build on.

Generally speaking, you will want to provide three to five years’ worth of records, where available. Some of the kinds of documents that are typically most important to a business valuation are:

  • Tax returns
  • Bank statements
  • Capital asset lists and assessments
  • Inventory records
  • Cash flow analyses
  • Profit and loss statements
  • Leases
  • Incorporation and registration papers
  • Names of suppliers and related agreements
  • Customer databases
  • Sales and accounts receivable reports
  • Employment contracts
  • Lists of debts, liens, and litigation

It can take a bit of time and effort to make all these documents and related ones accessible. In most cases, a business valuation professional will prefer to be presented with as much documentation as possible from the start. That will reduce the amount of back-and-forth needed later on and speed up the process of valuation.

  1. Make Any Indicated Adjustments

The numbers found in documents like tax returns and profit-and-loss statements rarely tell the whole story about a business. It is common for business owners to manage activities like taking profits and filing taxes in ways that are entirely legitimate but can contribute to unnecessarily depressed valuations.

While the history of your business cannot be rewritten, you can clarify it and flesh it out. That can improve your company’s valuation by putting past results in a more telling and flattering context. Two of the most common ways to accomplish this are:

  • Amending tax returns. Taxes are rarely as simple as most would hope, and that is particularly true of those filed for businesses. There are many legal ways to minimize your tax burden by keeping your business’s profits down, but these can backfire when the time arrives for a valuation. Fortunately, you can amend your business’s tax returns up to three years after filing them, a process that has recently become simpler. Paying a bit more in taxes could increase your business’s valuation significantly.
  • Producing a seller’s discretionary earnings statement. Every business owner makes decisions with which others could understandably disagree. This is true of many types of spending–especially by pass-through entities–that actually benefit the owner instead of the business. A seller’s discretionary earnings (SDE) statement moves such items into the correct column by adding them to the “total benefit of ownership” of a business. This can boost the realized profits of a business significantly and do the same for its bottom-line valuation.
  1. Filling in the Gaps: Document Your Background, Operations, Plans, and Predictions

Many companies have de facto policies and plans that are enshrined only in the minds of stakeholders. It will always be better to have the details written down and updated regularly.

An upcoming business valuation makes for a great opportunity to make sure everything critical to a company has been adequately documented. Informal plans regarding how to take a business’s marketing to the next level can be formalized and written down. Vague but reasonable ideas about business continuity measures and the like can be turned into rigorous, detailed, carefully documented plans.

It will often pay to survey others in a company to figure out where such efforts might bear fruit. Smaller businesses tend to see a lot of institutional knowledge and planning being carried around in the heads of executives, managers, and even low-level workers. Needless to say, it will be easier to arrive at an accurate valuation for a business if such morsels have made more readily available to others courtesy of documentation.

  1. Choose Your Valuation Professional Carefully

In some cases, it will be reasonable to establish a valuation for a particularly small business on your own using one of the most common methods. An independent valuation that has been produced by an experienced, qualified professional will always command more respect, however.

Because of that, most business owners opt to have others handle the intricate work of conducting valuations. Merely looking into a company’s reputation and approach to valuation should normally reveal whether others are likely to take its work seriously.

The simplest way to proceed is often to rely on a business brokerage. But you should be aware:  Not all business brokers are created equal.  Business brokers who regularly facilitate market-rate sales of businesses have a general idea of how valuations are done, but almost always do not know this in a detailed way, which may hurt the seller during the intensity of a sale with a knowledgeable buyer.  Think ‘Shark Tank’.  You’re either the Shark or you’re walking into the Tank.  Our prior high-level experiences and difficult-to-obtain certifications are the skills needed to carry out reliable valuations.

If you’re thinking of selling your own business or preparing for a valuation for another reason, contact CGK Business Sales to learn about the options and the process. An informed business valuation often proves to be the first step toward exciting and rewarding future developments. You can make the process of conducting one easier by preparing a bit beforehand.

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