Atlanta Business Valuations: How to Prepare and Understand a Business Valuation
Whenever you are contemplating buying or selling a business, presently own your company, or in the midst of estate planning, the value of a business is a critical component in all planning, acquisitions, or marketing your business. The most essential component of preparing or understanding a business valuation is a requisite knowledge of how to prepare and review Financial Statements. By first understanding these you are now well poised to begin to detect and review the nuances of a company’s operations, which then will provide insight so that you might be able to best Manage the Heart Beat of your Business.
A learned analysis of the basics of the information a Balance Sheet and Profit and Loss are prepared and the information to be gleaned, we are well armed to understand and apply many factual pieces of information that are available when properly analyzed. Though the best indication of a business’s value is what a willing buyer desires to pay and a seller is willing to accept, these insights will help guide you to many techniques and variables which will give you insight into what a business’s true value might be. An on-going business with the value of its cash flow, goodwill, and customer lists will be generally worth far more than a business that is liquidating. The below variables and analysis are directed to a business for which is presently in business and plans to remain so.
Net Income Before Taxes
The first place one typically looks to see the value of a business is its net income. Absent a positive net income or other substantive mitigating factors, the absence of a positive net income will dramatically lessen both the cash flow of a business and accordingly its overall value. In looking at a business income there are several variables that are most often considered and it’s typically different from industry to industry with businesses in different market segments being valued dramatically different than that from others. Frequently net income is evaluated under both a multiplier of net income or a rate of return comparison, of which one evaluates the amount of investment to buy a business relative to its cash flow.
Compensation/Benefits for Owners and Key Personnel
What an owner takes out in salary as far as his overall compensation/W-2, distributions, and benefits typically is also included along with net income as being part of the discretionary income included in consideration. Typically these are counted similar to a company’s net income amount when calculating a business’s overall net worth and multiplied or included along with the rate of return considerations.
Interest Expense & Other Non-Cash Charges
Non-cash charges such as depreciation and amortization are also added back to the net income amounts when evaluating a business value. As these items are legitimate financial and tax deductions of the business, they do not negatively affect the cash flow of the business so these monies are added back to the net income totals/rate of return analysis accordingly.
Desired Rate of Return & ROI (Return on Investment)
Not only are rates of return important with making an investment in a mutual fund or other investment, they are also a critical component of measuring a company’s overall value when looking at making or maintaining an investment. One should always be cognizant of the rate of return of a business and the other financial opportunities available at any given time as one would be prudent to always best invest where ones money may be multiplied.
Typically in a growing profitable business a business owner’s rate of return is best served by investing in one’s own business as often a few dollars may be turned over many times in a year making an additional rate of return on each completed sales cycle. As with all things in life, however, a business owner should not ignore other Risk Management/Retirement issues so as to keep all of their goals in continual mind leading to a balanced debt load between business and personal issues.
Sales Revenue Growth & Expectations
Several industries utilize as their base model a multiplier of sales as a business valuation method. This is perhaps most often used when the overall profitability of a particular industry is more constant than not. Although due diligence should be properly applied in evaluation past, present, and anticipated sales; focusing on this model alone would not result in the fairest evaluation of a business’s worth because of net income, salary, benefits, and a review of the other assets of the business.
Technical Ability/Training Level of Staff
A business that has a well-trained and competent staff is worth much more than one who does not. Care should be given to carefully evaluate and review credentials of both critical and support staff as it takes a team effort to make a business successful. Evaluating and reviewing resumes, personnel records, accreditation’s, and degrees are all meaningful steps in this process. Special care should be given as to whether a particular business will need a hands own manager or if the present staff are capable of the autonomous running of the business.
State of the Economy/Understanding Market Dynamics and Their Business Impact
Though there are no guarantees regardless of how good an economy is as businesses fail in both an up and down economy. A business with a good product, being in the right niche, having the right people, and in the correct location has a much better chance of success than one who does not satisfy these critical business components. However any good business valuation would be foolhardy should it fail to appropriately take in the national and worldwide economy as with world shrinks as technology expands.
No longer are cities, counties, towns, states, and even countries isolated as the impact of a global economy impacts all. Rising gas prices for example have immediate impact on consumer discretionary and perhaps a much longer effect as the rising
cost of fuel/oil impacts the transportation and production cost causing a ripple effect throughout the entire economy. Additional and heightened scrutiny should be done at the local of a business studying the changing demographics of a business immediate climate. Discovering the age, income, population, its spending patterns, traffic flow, zoning, political environment are all critical components of valuing as well as opening any business.
Lease Agreements & Fixed Asset Review/Analysis
A detailed evaluation of a company’s fixed assets/lease agreements should be done by item to ensure that fixed assets and leased equipment are in good working condition and are fit for their intended purpose. An evaluation should also be done to review as to whether fixed assets will have to be replaced, when, and their approximate replacement value. Leases, both for rented space and equipment, should be carefully reviewed to ensure that one understands all of the variables of a business and their impending impact on a business’s value.
Intellectual Property and Non-Compete Agreements
Having all the best equipment, the latest technology, a well-trained and efficient staff, and in a good economy are all indicators that positively impact the overall value of a business. However, just as a business is able to place locks on its doors and incentives to its employees, a business also needs to do what it can to protect its business interests. A business invests thousands of dollars and often years in the specialized techniques and skill set critical to a business operation and its success. Accordingly it is wise to consider having key staff sign a non-compete agreement restricting their ability to steal your clients and employees.
Due care and consideration is of the utmost at this time to ensure that you have a well drafted agreement which will be legally enforceable as many states, Georgia included, will not enforce any of a non-compete if it is deemed to be too broad or restrictive in scope. As such you will want to be sure to retain the services of an attorney who is familiar with these statutes and particularly those of the states in which you business operates/the agreement would be enforced.
Also a business with intellectual property such as patents, copyrights, and other specialized procedures will want to be sure to both formally and legally protect their interests. Often this process might also result in an individual/company being asked to sign a non-disclosure agreement to protect the ideas and processes of a company.
By skill and wisdom to business techniques, processes, and overall business strategy we are well placed to help you make what may well be the largest financial decision you will ever reach.
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