Basics of the Business Valuation Process: What to Expect
Many business owners who inquire about business valuations have a very limited understanding of what the valuation process entails. I’ve had well-meaning but unknowing clients hand me a couple years of Quickbooks P&Ls and say “call me when it’s done.”
In a typical business valuation, much of the work is spent on coming up with an accurate estimate of how much money a hypothetical buyer should be expected to make going forward if he/she purchases the business. This is usually not the same number as last year’s EBITDA, as calculated by the owner. Even when it is, we won’t know that until we do some digging – and that digging should involve a significant amount of your time. As the owner and/or management team, your role in the process is to help the appraiser to understand as much as possible about A) the business and B) the accounting of the business.
A few of the things the appraiser will need to gain an understanding of on the business side:
- Ability of management team
- Company reliance on management team
- Work force
- Company reliance on owner
- Any real estate owned or leased
- Growth potential
And on the accounting side:
- Accounting method: If the financials are cash-basis, they typically need to be converted to accrual
- Revenue recognition
- Job costing
- Variable vs fixed costs
- Capital expenditures vs depreciation
- Working capital needs
- Related-party transactions
- Unrecorded potential liabilities such as lawsuits or environmental issues
- Non-operating assets and liabilities
- Owner compensation
And many more.
It’s important to be willing to commit some time to the process. The more effort you put in, the more meaningful and accurate the results will be.
For assistance with a business valuation or questions on the process, contact Randy Feld, CPA/ABV at firstname.lastname@example.org.
*This article was written by Joe Williams, CPA, ABV