A Neumann Associates utilizes the services of leading national business valuation firms to provide company owners with accurate estimates of Fair Market Value. When establishing the valuation of a company we typically meet with the company owner for an hour off premise, collect all marketing and operational information, recast the cash flow based on the tax returns of the past three years, and provide such information to one of the valuation firms.
Business appraisals (for smaller firms) or business valuations (for larger firms) are similar in their approach, however the degree of detail provided for each company depends on the size of the respective operation.
Each business valuation firms’ database is built on thousands of business appraisals that have been completed for business owners, business brokers, financial consultants, and lending institutions. Placing the right value on your business is essential for an accurate business appraisal and comparative numbers are invaluable.
When seeking a business valuation, most business owners use tax returns or financial statements prepared for tax purposes as the basis for the financial presentation of their business. As a result, the market value of assets is not reflected because of depreciation or acceptable deductions that are written off for tax purposes. While this may be good for tax purposes, it does not reflect the years of hard work involved in accumulating business assets. The business Goodwill or intangible value, which represents a major component of what the business is worth, is not a consideration for income tax purposes and, therefore, not addressed in financial statements for tax purposes.
During the past twenty years, it has been our overwhelming experience that sellers considerably undervalue their businesses. A real-life example: a manufacturing company sold in the last year was valued at $30 million, and in fact, it later sold for approximately $30 million. After the closing, it was revealed that the seller and his CPA had originally thought the business was worth “about $17 million”. How could their opinion of value have been so far off? Well, neither the owner nor the CPA had any business valuation training, nor were they valuing businesses nationwide on a full time basis. Additionally, they were not trained in selling businesses, so their experience was very limited. These are essential components for the valuation of a company. Consequently, they were unable to assess the supply and demand for this type of business in the market place.
An independent business valuation ensures that the business is not undersold. Our detailed, 30+ page business appraisal analysis will convince a buyer that we have a valid basis and reason for a particular asking price. Thus, the business is not overpriced, and does away with the risk of buyers reading the prospectus and then aborting the acquisition due to overpricing (potentially compromising confidentiality in the process). Lastly, with business valuation documentation in place, the buyer’s lender will typically approve a loan considerably faster.
To establish audited financial statements by a reputable CPA firm, typical costs are in excess of $15,000 with another $30,000+ to obtain a qualified valuation. Due to our large volume of business valuations, we have the benefit of drastically lower costs among the five national business valuation firms that we utilize.
Even though a business valuation still might appear costly, the potential benefits far outweigh that cost. Typically, the cost is a mere fraction of the sought after asking price. By erroneously undervaluing your business, you could lose thousands of dollars. Without a solid analysis, you will need substantially more time in selling your business. Many buyers and investors will simply not look at your business as being seriously for sale, while others may engage you in long price discussions, and lenders will take more time approving a loan.