Business Appraisals

2012-02-23T11:16:00.002-08:00

Market Value Business Appraisals www.businessappraisals.com

Clear
Our business appraisals are written to be easily understood. We use common business terms, comprehensive step-by-step mathematical analysis and a thorough explanation of each step in the process. The result is an easy to read and understand report.

Accurate
By researching and analyzing business sales to determine components that represent value, we have created an accurate appraisal process. It is realistic and represents true market value. No rule of thumb or comps, our appraisals are unique to each individual business.

Affordable
By standardizing and simplifying the appraisal process we can offer more affordable pricing for our services.
Business Appraisals 800-829-4842
949-254-4062 Cel
714-639-6085 Direct
www.businessappraisals.com/rklein@businessappraisals.com

2012-02-23T11:15:00.001-08:00

Searching for Market Value

There are a number of standard appraisal methods used to value a business that include, Asset approach, Income approach, Market approach (Comps), Capitalization of Earnings and Discounted Future Earnings. Each one of these methods individually does not always represent the true value of a business. We have seen appraisals where the derived value of these five different approaches varied by 500%.

Also used are Rule of Thumb values based on multiples of adjusted profits or percentages of gross sales. The rule of thumb methods only work when there are many similar businesses having the same operating expenses and assets. This doesn’t always happen and when you use the method on more unique businesses it just doesn’t work.

Using Comps tends to give the average value of the compared businesses and not the value of the business being appraised.

Capitalization of Earnings and Discounted Future Earnings are less often used and tend to end up with values far from Market Value.

After working with the standard methods for some time and evaluating what creates value in a business we learned that combining the Asset, Income and adding market influences into a single method gave an accurate market value. Having been involved with our own Business Brokerage for over twenty years we were also able to look at the businesses we sold and adjust and refine the combined method to reflect a True Market Value Appraisal.
Robert Klein

2011-12-15T10:50:00.000-08:00

Business Sales Multiples

First we need to figure out what multiples we are talking about and what we are using them for. There are multiples of gross sales, seller’s discretionary earnings (SDE), earnings before interest and taxes (EBIT), earnings before interest, taxes, depreciation and amortization (EBITDA). Multiples are also used as general rules of thumb. For this article I will concentrate on the methods used for the purpose of the sale or purchase of a business.

Multiples of gross sales are the least accurate as they do not account for the quality and profitability of a business as they tend to be averages for classes of businesses. Some business owners know how to run a business and make excellent profits while others barely survive. These multiples are generally used for business categories that have large numbers of the same type of businesses, such as franchises.

Multiples determine the relative value of the business’s cash flow, but they do not measure the business asset value. I use a multiple to determine only the cash flow portion of the business. An asset bases analysis is a separate part of the appraisal.

For a sale of a business we need to know the SDE and the EBITDA In other words, the net income plus the seller’s discretionary earnings, interest, taxes, depreciation and amortization are necessary. This number should represent the amount of money a new buyer would expect to have available after purchasing the business. Interest and taxes will depend on how the business is financed and run. Depreciation and amortization are tax credits and the money remains in the business.

Differences in businesses will require use of different multiple values. Manufacturing businesses will have a middle of the road value while construction companies will have a multiple of about half and some high demand businesses may be double. Size matters, as larger businesses will have larger multiples.

Changes in economic conditions don’t change the basic multiples I use for appraisals. As economic conditions grow or deteriorate the gross sales and adjusted net profit of a business will go up or down thus increasing or decreasing the businesses value. I also use certain economic changes to adjust the net profit based on such things as growth or decline in sales over prior years, businesses having customers that represent a large percentage of their business and other cash flow influences. I very rarely find reason to adjust the multiples I use for an appraisal and I have been doing this for over 20 plus years.

2011-10-10T11:49:00.000-07:00

Importance of a Business Appraisal

Would you buy or sell a house or commercial property without first having an appraisal? Most buyers and sellers of small businesses don’t bother determining a business’s true market value. Buyers are reluctant to spend money on an appraisal and sellers usually pick an arbitrary price or one higher than the business is actually worth. It is the selling broker’s responsibility to get the highest possible price for his client. Yes, the broker has a responsibility to be honest and fair to the buyer, but his primary responsibility is to his client. This leaves the buyer hanging out there with little sense of the business’ true value. He may bring in his accountant or other advisors but these people who are probably very good in their profession may not have the years of experience and skills necessary to determine the true market value of the business. Buying or selling a business is probably the largest financial transaction a buyer or seller will ever make in his life. It may involve his life’s savings, new debt or his entire retirement prospects. There are many situations where a buyer has paid too much for a business and can’t make it work. The buyer looses his investment, a bank may loose on its loan, and the seller will loose money he has lent to the buyer and possibly get a worthless business back. Doesn’t it seem important to confirm that the business you are buying or selling is a wise, or at least not a foolish sale or purchase? A Business Appraisal should be a mandatory process for any business sale or purchase. It definitely will increase the chance of success and protect the buyer’s and seller’s hard earned assets.

Creating an Accurate Business Appraisal

2011-06-20T12:01:00.000-07:00

Over the years I have seen many appraisals from many different appraisers. I have been totally surprised by the wide variations of methods and the accuracy of these appraisals.

Appraising businesses accurately is not an easy task. There are about five different methods that can be used along with variations in the purpose of the appraisal. None of these methods addresses the total value of a business by its self. One method might look at cash flow value another at asset value and another at a capitalization rate. It is up to the appraiser to pick the appropriate method or give each of the methods used a percentage of the final value. Purpose also changes, as an appraisal done for the sale of a business will be different than one done for a divorce. Also, the IRS has certain requirements that must be followed for any appraisals submitted to them for such things as change in corporate structure or family trusts.

Financial statements and tax returns can create problems. Financial statements are always different, and tax returns don’t always match the financial statements. I can spend hours going through the documents, talking to the business owner or the business’ accountant looking for answers. To do an accurate job on the appraisal I have to understand these documents completely and how they relate to each other.

There is a wide variance in the quality of business appraisals mostly because of lack of experience. It is easy to pick up an accounting book and find the different methods of doing an appraisal, picking out a formula and plugging in some numbers. This process doesn’t necessarily give you an accurate appraisal. Most accountants know this and turn to an experienced Business Appraiser for an appraisal. Also, be aware that there are appraisers that stuff the appraisal with irrelevant and highly technical information to exaggerate the complexity of the appraisal or over inflate the appraisal to make an owner feel he has a high value business. With a growth in the internet, we now see “fill in the blanks do it yourself” business appraisals. It is not possible to get an accurate business appraisal this way. There is no way to provide a short cut to an accurate business appraisal.

I use a blended method of appraisal consisting of cash flow, asset value and market analysis. This blended method evaluates all items that create value in a business. I never have to guess if I am using the correct method or find percentages to use for each component. I have successfully used this process for over 25 years for business sales and business appraisals. My goal has always been to provide clear, accurate and affordable appraisals that meet the needs of my clients.

Robert A. Klein
President Business Appraisals

2011-06-10T10:30:00.000-07:00

A Guide to Business Appraisals

There are a number of standard appraisal methods used to value a business that include, Asset approach, Income approach, Market approach (Comps), Capitalization of Earnings and Discounted Future Earnings. Each one of these methods individually does not always represent the true value of a business. We have seen appraisals where the derived value of these five different approaches varied by 500%.

Also used are Rule of Thumb values based on multiples of adjusted profits or percentages of gross sales. The rule of thumb methods only work when there are many similar businesses having the same operating expenses and assets. This doesn’t always happen and when you use the method on more unique businesses it just doesn’t work.

Using Comps tends to give the average value of the compared businesses and not the value of the business being appraised.

Capitalization of Earnings and Discounted Future Earnings are less often used and tend to end up with values that also tend to give the average value of the type of business.

After working with the standard methods for some time and evaluating what creates value in a business we learned that combining the Asset, Income and adding market influences into a single method gave an accurate market value. Having been involved with our own Business Brokerage for over twenty years we were also able to look at the businesses we sold and adjust and refine the combined method to reflect a True Market Value Appraisal.

The next step was to find a way to keep the through detailed analysis of the business being appraised and present it in a simplified easy to read manner. By looking at the components of a business that created value and categorizing them into Income, Assets and Market related we were able to create an Excel program to present the appraisal. The program was designed to be flexible so that it can be changed to meet different types of businesses and the many different purposes for business appraisals. This system may look simple but the complexities of doing an appraisal are still applied. There are many things that we still consider that are not listed in every report. When they are needed we add them into the Excel program.

Appraisal Requirements

For an appraisal system to work it must address the following:
1. the profitability of the business
2. the tangible assets of the business
3. the presence of intangible assets
4. the value derived should represent the market value
5. have flexibility to allow for the terms of a sale.
6. simplicity - Usable and understandable.

The first step was to determine what components in a business have value. These are some of them:
1. a functioning business with modest growth
2. skilled employees
3. working equipment
4. adequate usable inventory
5. a quality product or service
6. a profit
7. collectable receivables
8. a broad customer base with no very large customer
9. some new product development capabilities
10. a good reputation (name) in the market place
11. a clean, adequately sized work area
12. a financially sound operation with a good accounting system
13. the business located correctly for its market place
14. a good base of suppliers

After building this list it has to be divided to fall into a profit/asset based appraisal system. They are categorized as follows:
1. Profit based items.
a. business profit
b. a functioning business
c. business size - gross sales
d. intangible assets
1. skilled employees
2. a quality product or service
3. a broad customer base - customer list
4. new product development capabilities
5. a good reputation - business name
6. good financial management

2. Asset based items:
a. inventory
b. equipment
c. receivables
d. contracts
e. patents
f. trademarks
g. real estate

By Robert A. Klein, President and owner of Business Appraisals, providing business appraisals on all types of businesses. Former President and owner of Business Search, Irvine, California, a Merger & Acquisition firm specializing in the sale of manufacturing, distribution and related businesses, with programs for both buyers and sellers.

Market Value Business Appraisals www.businessappraisals.com

2008-03-19T09:57:00.000-07:00

Clear
Our business appraisals are written to be easily understood. We use common business terms, comprehensive step-by-step mathematical analysis and a thorough explanation of each step in the process. The result is an easy to read and understand report.

Accurate
By researching and analyzing business sales to determine components that represent value, we have created an accurate appraisal process. It is realistic and represents true market value. No rule of thumb or comps, our appraisals are unique to each individual business.

Affordable
By standardizing and simplifying the appraisal process we can offer more affordable pricing for our services.

Business Appraisals
800-829-4842
949-254-4062 Cel
714-639-6085 Direct
www.businessappraisals.com/rklein@businessappraisals.com