What is Business Valuation?

Selling a business is far different from selling a house or other tangible asset. Unlike real estate, it is not unusual for 50% or more of an operating business’s value to be based on intangible assets such as goodwill, intellectual property, licenses, location, etc.

Two businesses both netting $250,000 can have considerably different market values due to such comparative considerations as:

  • revenue growth rate
  • equipment condition
  • customer concentration
  • intellectual property
  • competitive situation
  • owner’s role
  • administration systems
  • labor and capital intensity

There can be many valuation differences for businesses that might appear similar at first. Attempting to value a business based strictly on market comparables results in an average business valuation that doesn’t highlight the business’s unique assets.

The business valuation process begins with a detailed examination of the company’s revenue and expenses to accurately determine the true earnings performance of the business.

  • Is the brother-in-law earning $50,000 really needed?
  • Is a Porsche Cabriolet necessary for delivery purposes?
  • If the seller owns the building, is the rent at market rate?
  • What about stockholder compensation mystique in S versus C corporations?

These are just a few examples of the types of difficult questions appraisers ask in order to complete an effective business valuation.

Business Valuation and Financial Disclosure

Another major reason for a business valuation is to avoid surprises in the due diligence process, which can quickly kill a deal. Full financial disclosure upfront to a buyer is extremely important. With precise earnings information in hand, the appraiser employs several business valuation methodologies and weights the various results according to their pertinence to the business in question.

Finally, the expert appraiser subjects the business valuation to an extensive set of qualification criteria from over 100 SBA (Small Business Administration) lenders for further validation of the value. If the value withstands the SBA’s requirements standards, there is an added basis for its validity.

Every business has a range of fair market value – the business valuation process is not totally scientific. The challenge of the business valuation process is to determine a business’s true earnings and to assign fair value to its intangible assets. Contact George & Company today to find out what your business is worth.