Although it is not a mandatory requirement, few people would buy a piece of real estate without undertaking a few sensible precautions such as asking for a survey before proceeding.
A survey will ensure that the property has not been overvalued and it will highlight any potential flaws. In this way, a survey provides some negotiating leverage on price.
In exactly the same way, it makes sense to have professional checks carried out on the potential purchase of a business. An independent valuer will analyze the business's background, compare it with the local market and with others in its sector and uncover any financial irregularities or business flaws which may undermine the business in future.
Most importantly, this allows the individual buying a business to understand the real value of the company, rather than its advertised value.
Independent valuation and price negotiation go hand in hand.
Armed with a thorough valuation report, the prospective buyer is in optimal position to negotiate a more competitive price.
Understandably, the vendor will want to achieve the best price for the business and will try to present it in a good light. The valuer's job is to see past any presentational veneer in order to determine a price that is both fair and correct.
A good independent valuer will have a strong understanding of the local business market and will also have a good grasp of the sector more broadly. This is essential knowledge because the valuer will provide a professional opinion on the future of the business, but also of the market which helps business buyers to avoid buying into a failing market or a dying sector.
Choosing an independent valuer
Choosing an independent valuer should be a priority for anyone proposing to purchase a company. If possible, it is good to get someone through personal recommendation. Should that prove difficult, it is straightforward to find a valuer by looking online or going through local business services such as the U.S. Small Business Administration district office.
Ensure that any valuer is accredited by the National Association of Certified Valuation Analysts, the American Society of Appraisers, or the American Institute of Certified Public Accountants. These organizations require their members to follow a formal set of standards which help to ensure an efficient and fair service.
In addition, they mandate minimum requirements for reporting which help to ensure that ensuing business valuations are fully independent, objective, fair and thorough.
Once the valuer has been selected, it is necessary to decide what type of valuation report will be most suitable. There are five approaches, and it is worth understanding the various methods before going ahead.
Types of valuation
The Capitalized Earnings method is concerned with return on investment (and will be of particular interest to any potential investors in the business). The Excess Earnings method focuses on earnings too, but it differentiates between returns on assets and any other earnings.
The Cash Flow method is useful for anyone who will need a loan to support the business as it determines the size of borrowing that the business could realistically support. The Tangible Assets method is also often known as the Balance Sheet method. As the name suggests, this approach considers the business's tangible assets in valuing the company (these include physical resources, such as real estate, equipment, vehicles and so forth).
Alternatively, the Value of Specific Intangible Assets method creates a comparison between the respective values attached to the cost of purchasing an intangible asset from the existing company and having to develop the asset from scratch. (Intangible assets might include intellectual properties, brands, patents, customer goodwill and so forth).
Although it is important to determine what type of reporting is most appropriate for the business purchase under consideration, the most important step is to get a professional and independent valuer on board. That way, buyers can have confidence that they are getting the best possible business price available.