Selling a business starts with a business valuation.
Business sellers often ask, “Why is an appraisal critical to a Seller when selling their business?”
The best approach when selling your business is to list all the items so there is no confusion about what is for sale. This includes isolating and reporting any real estate, inventory, fixtures, furniture, equipment, leasehold improvements, or assets not part of the sale.
Additionally, consider listing the business’s current liabilities and noting whether they will expire when the company changes ownership, stays with the Seller, or transfers to the Buyer. A better idea is to remove any personal or unique items that are not part of the sale of the business. This eliminates any ambiguity and becomes one less tension point in the transaction.
Once this is done, one of the first steps to selling the business is to get an appraisal of it as a going concern. If you’re the business owner, you may have an opinion about what the assets are worth, but that opinion will not be acceptable to a genuine Buyer. The best approach is to have a third party perform the appraisal for you.
Importance of a third-party appraisal
There are several reasons to use a third-party appraisal, including that it provides confidence about the value of the business and the asking price. It provides an informed opinion about the business value so the Seller can decide if the asking price will be enough for them to sell the business. Most sellers think their business is worth more, so the valuation keeps the Seller real with his price expectations and hopefully won’t take the business to market if they are not going to get a price that works for them. A business valuation also helps the Seller see its strengths and weaknesses from a third party’s perspective and understand its tax situation. That is, the price the Seller gets when he closes escrow doesn’t mean they get to put all that money in their pocket. The IRS wants its tax piece from the business sale, and the business valuation helps inform the Seller.
Another two reasons for a business valuation are that it puts less strain on the transaction. A transaction often has many deal points between the Buyer and Seller. The more deal points and tension in the transaction, the greater the chances it will not close escrow. As price is usually one of the most significant items, having a reasonable purchase price eliminates any tension and allows the focus to move to the terms and conditions of the sale. Also, if the business transaction requires the Buyer to obtain third-party finance, the business valuation will help all parties work through that scenario. Some lenders will require the appraisal that they order; others will work with the third-party appraiser if the skills and certifications of the appraiser meet their standards, as well as the quality of the appraisal.
Some final good reasons for an appraisal are that it also helps and gives confidence to the Buyer about the business and any advisers the Buyer chooses to use. The Buyer is always the most nervous party in the transaction, as they have the most to lose personally, financially, and professionally. The greater their confidence, the more likely they are to continue their inquiry. Sellers forget that buyers have many options, including saying no and not buying a business. If you are a business Buyer and you find two businesses that interest you, and one has done a valuation and one hasn’t, which do you think would be more attractive to make further inquiries about? Same question, but instead of being the Buyer, put your feet in the shoes of a lender. A Buyer brings you two businesses they want to buy and needs a loan. One has a business valuation and one does not. Which business do you think the lender will spend more time considering for a loan?
A business valuation is an essential aid to all parties in the transaction. A business valuation normally refers to the appraisal of a business as a going concern. If the business includes real estate, this would be appraised separately from the business. If the business is not currently profitable, it can still have value if it is part of the assets, such as Fixtures, Furniture, Equipment, and /or inventory. To appraise these assets, a Machinery and Equipment Appraisal would be necessary, not a business appraisal.
An appraisal is a great asset to a business transaction. Putting the proper report together requires cost and time, but this should far outweigh not getting this done.
If you would like to know the value of your business or simply get more information, click this link to get a free sample of a Broker’s Opinion of Value – Sample business valuation
For more immediate help, you are welcome to send an email to Andrew Rogerson or give me a call at toll-free (844) 414-9700
