Over the years, the Principals at Cole & Company have transferred ownership of manufacturing, service, medical, agricultural, retail, distribution and professional practice firms throughout the United States. This brokerage of “Small Business” has provided crucial insight into what fair market value really is. So yes, we can create spreadsheets with the best of them but we’re also grounded in real world transaction experience.
Cole & Company, Inc. is now considered a “qualified source” to conduct business appraisals for SBA financing. With its Standard Operating Procedures (SOP) 50 10 5 (K) effective April 1, 2019, the SBA requires lenders to obtain an independent business appraisal from a “qualified source” for certain guaranteed loans and recognizes the Business Certified Appraiser (BCA) credential as such a source.
So, what’s your Business really worth?
How many times have you heard a so-called “expert” tell you how to value a business based on a multiple or percentage of this or that? This so called business “valuation” is nothing more than a “rule of thumb” (a principle with broad application that is not intended to be accurate or reliable) probably obtained from hearsay or the internet and your strategic business planning deserves better. Valuing a business takes skill, experience, independence and of course, certification. Does anyone really expect to value a complex business with math a 10-year old can do in their head?
Types of Business Appraisal Reports
There are varying uses and types of value requested by the users of our reports which can be broken down into 3 types of reports:
- “Appraisal Report”… simply stated, “an independent, defensible estimate of value”. Specifically, a formal presentation of the value of a Business based upon the Uniform Standards of Professional Appraisal Practice (USPAP) containing a summary of the material factors that lead to a conclusion of value. Ideal for most of the uses below and range in cost from $2,000 to $10,000.
- “Calculation Report”… though not an appraisal, it’s an accurate, efficient and cost effective alternative to an appraisal based on the performance of limited procedures. Ideal for smaller businesses in contemplation of buy or sale, amicable divorce and partnership dissolution’s as well as business exit planning ranging in cost from $1,000 to $2,000.
- “Market Report”… instead of an appraisal, many business owners prefer to know the general value of their business based upon comparable sales of similar businesses. These reports range in cost from $250 to $1,000 and are best suited for small “mom and pop” businesses with very few employees.
Types of Business Value
Also known as Standards of Value, this refers to the definition of value used in a particular report. There are varying types and definitions including Fair Value and Investment Value but the most commonly used is Fair Market Value which can be defined as:
- the price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.
Approaches and Methods to Business Valuation
There are distinct differences between approaches and methods when it comes to determining the value of a business. An”Approach” is a general way of determining a value indication of a business whereas a “Method” is within an approach and is a specific way to determine value.
Conceptually, there are three broad approaches to value each containing various methods:
- “Asset Approach”… a general way of determining the value of a business based on the value of the assets net of liabilities using one or more methods such as the “Adjusted Net Asset Method”, the “Excess Earnings Method” and/or the “Liquidation Method”.
- “Income Approach”… a general way of determine the value of a business using one or more methods that converts anticipated economic benefits into a present value single amount such as the “Capitalization of Earnings Method” or the “Discounted Future Earnings Method”.
- “Market Approach”… a general way of determining the value of a business using one or more methods that compare the subject business to similar businesses that have been sold in the marketplace using a “Transaction Method”, “Merger & Acquisition Method”, or “Guideline Public Company Method”.
You probably need a Certified Expert if
- You want to buy or sell businesses or practices at fair market value.
- You’re a lender that’s been asked to finance an acquisition.
- You’re a financial professional developing an estate plan to protect your client’s wealth.
- You’re involved in a partner buyout.
- You’re trying to determine value for a divorce settlement.
- You need to negotiate an insurance settlement.
- Exit strategies, mergers, acquisitions, ESOP’s, … the list goes on and on!