Do I Need a Business Valuation?
by Michael Setunsky
Do I need a valuation to sell or purchase a business opportunity? If you are selling a business, a valuation will give the Seller a very good idea as to what the value of the business may be on the open market. If you are purchasing a business, a valuation with give the Buyer an opinion as to where the Seller stands in a competitive market. Whether you are a Seller or a Buyer, a valuation will assist you in making an informed decision as to the basis for the sales price.
Let us first look at it from the prospective of the Seller. Obviously, the Seller wants to get every dollar from the sale of the business. However, if the sales price is too high, the Seller will price the business out of the market and limit the number of potentially well-qualified buyers. If the sales price is too low, the Seller will loose money on the transaction by giving away the business. How do we make this a Win-Win situation? One way is to value the business properly with up to date information and data.
Buyer's usually base their financial decisions on hard data that will produce a viable income stream with a positive cash flow. In other words, can the Buyer put money in their pocket after the expenses and debt service are paid? Additionally, buyers do not like to purchase potential. Unfortunately, potential does not pay today's bills and expenses. A properly priced business will provide the Buyer with a positive cash flow. If the sales price is too high, it will not offer the Buyer, the required income stream to operate the business successfully.
This statement is worth repeating: Buyer's usually base their financial decisions on hard data. This means, if a Seller cannot show a Buyer all the income on paper in the P&L (Profit and Loss) Statement and/or Tax Returns, the Buyer will likely walk away from the deal. Just like potential, a Seller cannot sell income not reported on the financial documents. Furthermore not reporting all earned income in against the law.
The following is a checklist of information required from the Seller to complete a proper business valuation. (Note: This is not an exhaustive list. Additional information may be required.):
- Current Balance Sheet.
- Profit and Loss Statements - Last three years (preferably five years) plus current year-to-date statement.
- Federal Income Tax Returns - Last three years (preferably five years).
- Current Lease and all related documentation.
- Franchise Agreement, if applicable.
- Documentation on any loans on the business.
- Current list of Furniture, Fixtures and Equipment (FF&E) with Fair Market Value of each item.
- List of current Inventory with date of purchase for each item.
- List of Accounts Receivable (Aged).
- Leasehold Improvements with In-Service dates.
As you can see, the Seller plays an important role in developing a proper valuation of the business. In the end, the valuation is only as good as the information provided by the Seller.
Now, let us look at it from the Buyer's prospective. A Buyer does not want to pay more for the business than it is worth and additionally, the Buyer wants to make sure they are getting what they are paying for in the price. The Buyer should have a valuation prepared to see if the asking price is viable as part of the Due Diligence process. The valuation will give the Buyer peace of mind or it can serve as the basis for negotiation, if the sales price is too high.
About the Author: Michael Setunsky is the Broker and owner of Michael's Commercial LLC serving the Northern Virginia commercial real estate market. His more than 23 years of experience as a commercial real estate and business broker has earned him the distinction for being one of the top commercial real estate producers in the Mid-Atlantic Region. He also serves on the Mid Atlantic Real Estate Marketing Association's (MAREMA) Board of Directors, and is a Commonwealth of Virginia licensed Instructor. He teaches Pre-licensing, Post Licensing Education, Broker's and Continuing Education courses. Visit his company web site at http://michaelscommercial.com/.
Comments(2)