Mergers & Acquisitions Advisory

A Neumann & Associates, LLC

November 10, 2020

Everything You Need to Know About Valuating a Business

By Achim Neumann

A business valuation in New York, Pennsylvania, or anywhere in the country is important to buyers and sellers alike. After all, without proper business valuation methodology, it becomes very difficult to establish a fair selling price for any business.

However, despite its undeniable importance, many buyers and sellers take the wrong approach when valuating a business. This either completely minimizes their chances of buying or selling a business, or potentially means they pay more than they should have or end up selling their business for less than it’s worth.

Common Business Valuation Methods

There are many different methodologies and schools of thought when it comes to determining how much a business is reasonably worth. Some of the most widely used methods to calculate a business’ value are applying a set multiple to average yearly revenues or average yearly profits, or looking at a company’s assets and liabilities to get a sense of how much it is realistically worth.

For the first two methods ofvaluation, it’s important to note that the multiple used is often dependent on the industry or type of business, and using profit – or better cash flow – instead of revenue is typically the best way to go about this calculation.

This is because the bottom line is what actually matters to an existing or new owner, and profit margins can vary massively from business to business or even from year to year.

However, even with the aforementioned considerations and adjustments, all three of these methods of valuation are still, in most cases, too simplistic and therefore don’t give the full picture.

The Alternative: Professional Business Valuation

Even if you’re good with numbers and can read a balance sheet, it’s best to hire a professional when it comes to a business valuation, irrespective of whether you’re the buyer or the seller.

The valuation an accredited professional business valuation firm or individual consultant provides is much closer to the real, inherent fair market value of a company. This is because they consider countless other factors and variables which most of the commonly used business valuation models neglect to take into account.

This includes things such as brand value, management structure, how profits have increased or dropped over time, cashflow fluctuations, plus many other important considerations.

Note: For someone to be properly qualified to valuate a business in the United States, they should be certified by an organization such as the Appraisal Foundation and the Institute of Business Appraisers, among others.

Market Value vs Investment Value

There are a few different ways to look at a business’ value, and the two most important are its market value and its synergistic (investment) value.

A company’s market value is how much it’s worth based on what a buyer or investor would realistically expect to pay to buy a particular business in the market at a particular point in time. On the other hand, a business’ synergistic (investment) value not only involves looking at how much it is worth based on market conditions, but also how much it is worth to the particular prospect buyer after obtaining certain costs savings in combing operations with the buyer’s company.

In some cases, a business’ market value will be identical to its investment value, but in many cases there can be a significant difference between the two.

About A Neumann & Associates, LLC

A Neumann & Associates, LLC is a professional mergers & acquisitions and business brokerage firm having assisted business owners and buyers in the business valuation and business transfer process through its affiliations for the past 30 years. With an A+ Better Business Bureau rating, the company has senior trusted professionals with a deep knowledge based in multiple field offices along the East Coast and has performed hundreds of business valuations in its history. The firm’s competitive transaction fees are based on successfully completing transactions. For more information, please contact A Neumann & Associates at 732-872-6777 or info@neumannassociates.com

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“I'm an attorney. I have represented the buyers and sellers of businesses for 20+ years. Recently I had the pleasure of handling a transaction where Richard Wilder of A. Neumann & Associates was the broker for the seller. Mr. Wilder was of great service to his client. He is very knowledgeable and organized. Thanks to his guidance the transaction proceeded smoothly and closed on time. He is highly recommended.”

Nick Ferrante

“Richard, you came to my office a few years ago and were wonderful in explaining your process and procedures. Our company is probably an anomaly in that we sold the majority to two long time employees and I financed them both. Our company is entering its 45th year and is still thriving. The purpose of the note is to thank you very much for the service that you provide. Thank you again.”

John Foug, Seller

“We had a great experience working with Richard Wilder from Neumann and Associates as the sell-side broker for Blade Runners. He was knowledgeable, professional, and clearly had his client’s best interests at heart. Richard helped keep the process smooth for everyone, and thanks in part to his efforts, we found a fantastic owner to partner with. We'd gladly work with Richard and the Neumann and Associates team again.”

Justin Martin

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Isaac Palmer, Jr.

“If you are looking for a professional and informative company that meets your needs, A Neumann & Associates is the company to go with. Ted Kantor went above and beyond to make our experience as easy as possible. Ted was helpful from the start of our process to the end. He was there every step of the way to guide us and answer all of our questions. He handled all of the in-depth communication and followed up on every detail. We strongly recommend Ted Kantor to help you whether you're buying or selling. It was a great experience. We never imagined it would go as smooth as it did. The Laluna's (Andy, Maria & Tony Jr)”

Maria Laluna

“A Pleasure to work with - I highly recommend them! Working with Richard Wilder was a pleasure, and he found us the perfect match.”

Laura Keith-Macario

“This spring we acquired a business that was represented by Richard Wilder at A Neumann & Associates. Small business acquisitions can be very emotional for the sellers and life-changing for the buyers, and Richard was keenly aware of this throughout the process. Although he was working for the sellers and not for us, he knew that most business owners see their business as their baby so the only way to have a happy outcome for his clients was to also have a happy outcome for the buyers. Knowing how nerve-wracking this process can be (think home buying x 10), he never dropped the ball on keeping everyone updated, anticipating potential snags, and guiding us along in the process. We highly recommend Richard.”

Shannon, Buyer

“My business was my baby for over 40 years. It is a tough and cruel world out there when it comes to selling your business. Neuman and Associates provided the professional guidance/protection to get the job done with care and no pressure. In my view a tremendous value. I would recommend them to anyone seeking to sell their business. Eric Storck, president of Blade Runners Inc.”

Eric Storck, President - Blade Runners Inc.

“I’m really impressed with how your firm operates. The focus on confidentiality, the thorough vetting process, and the use of third-party accredited valuations really stand out. It’s easy to see why you’ve built such a strong reputation over the years.”

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If you are considering selling your business, please contact us to learn more about our comprehensive service spectrum. Our experienced professionals will answer all your questions about selling a privately held business in complete confidentiality. Please fill out our contact form, or call us at 732-872-6777. We will contact you directly and will never identify ourselves to your employees.

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