Business Broker Armen Nazarian Says Hire an Accountant to Determine the Value of a Business for Sale
A pending sale, lawsuit or tax and estate planning will drive business owners to hire a skilled professional to tell them what their companies are worth. The sale of a business is perhaps the most common reason to seek a valuation, but the process is the same no matter why it's required.
Many business valuation experts use some combination of three valuation methods to arrive at a fair market value. The process clearly cries out for an expert, like a certified public accountant, who understands profit-and-loss, balance sheets, and a variety of accounting procedures.
€ €Going Concern€ Asset-Based approach. The company's assets are subtracted from its liabilities. The current market value of the assets are added with the assumption that they are to be sold outright, and then the balance is calculated as if the liabilities will be paid off immediately.
€ Earning Value approach. A company's past earnings are plugged into several formulas to determine an expected future return, multiplied by an industry-specific factor.
A company head hoping to sell a small business or an entrepreneur who's looking to buy needs to know what the company is worth. Armen Nazarian of Capital 1 Business Brokers in Farmington Hills, Michigan says determining the real value is a crucial aspect of the sale. €A great way to verify value is to compare the business to similar businesses in the same industry, and in the same metropolitan area,€ says Nazarian. € It's really critical to the whole buying process.€
In many cases, a seller will engage the services of an expert to determine a reasonable market value. Buyers often hire their own analysts to assess the price of a business they wish to acquire. These dueling experts may arrive at vastly different figures. Their ability to compromise can result in a mutually satisfactory transaction for both buyer and seller, but much of that process depends on what method each side uses to arrive at a price.
On the selling side, the plan is to make the price low enough to attract a bevy of buyers, while making sure potential profits aren't sacrificed.
From the buyer's standpoint, the value of a business compared to its posted cost must be assessed. The price paid for a small business can seriously affect months or years of down-the-road profits, so this factor shouldn't be taken lightly.
A Historical Look at Business Valuation. Because so much of the value of a business is tied up in numbers€"revenue, property appraisal, the replacement cost of equipment and inventory, and so on€"and calls for engaging the Internal Revenue Service, someone trained as an accountant (and preferably a CPA, who understands various tax consequences) is in an ideal position to offer valuation services. €A CPA can quickly give you an idea of how taxes will impact the success of the business,€ says Nazarian.
Prior to the 1920s, most businesses changed hands through direct involvement of buyer and seller. The party that proved to be the better negotiator generally won out. A buyer would look at the seller's personal standard of living and community status and make an off-the-cuff determination about his own expected cash flow and profits once the business changed owners.
But prohibition was a major factor in altering the business valuation landscape, because the value of most of the nation's breweries and distilleries dropped like a rock practically overnight. A would-be buyer could no longer base perceived value solely on past profit and loss. The IRS eventually created a formulaic method to determine the value of intangibles and "goodwill" as a means to arrive at the total value of a business. Though the federal agency's motivation was tax-based€"if taxes are involved, the IRS is bound to be on the scene€"the move was ultimately applied to buyer-and-seller transactions as well. €€
In the late 1970s, many U.S. accounting firms began to establish departments that were exclusively involved in determining business values. The intention was to assist in tax and estate planning, but it made sense to also offer this service in sales transactions.
In 1997, the American Institute of Certified Public Accountants, a respected U.S. accounting licensing and trade organization, introduced a certification process that allows members to become licensed as business valuation experts. Members are required to hold a CPA's license, have significant involvement in at least 10 prior valuations, pass an eight-hour written exam, and maintain 20 or more hours of annual continuing education in business valuation to qualify for the designation of Accredited in Business Valuation (ABV). Any accountant whose name is appended with the designations CPA and APV on letterhead and business cards can be considered an expert on the subject, privy to all the up-to-the-minute changes in rules and regulations, and a highly reliable business valuation asset.
Many business valuation experts use some combination of three valuation methods to arrive at a fair market value. The process clearly cries out for an expert, like a certified public accountant, who understands profit-and-loss, balance sheets, and a variety of accounting procedures.
€ €Going Concern€ Asset-Based approach. The company's assets are subtracted from its liabilities. The current market value of the assets are added with the assumption that they are to be sold outright, and then the balance is calculated as if the liabilities will be paid off immediately.
€ Earning Value approach. A company's past earnings are plugged into several formulas to determine an expected future return, multiplied by an industry-specific factor.
A company head hoping to sell a small business or an entrepreneur who's looking to buy needs to know what the company is worth. Armen Nazarian of Capital 1 Business Brokers in Farmington Hills, Michigan says determining the real value is a crucial aspect of the sale. €A great way to verify value is to compare the business to similar businesses in the same industry, and in the same metropolitan area,€ says Nazarian. € It's really critical to the whole buying process.€
In many cases, a seller will engage the services of an expert to determine a reasonable market value. Buyers often hire their own analysts to assess the price of a business they wish to acquire. These dueling experts may arrive at vastly different figures. Their ability to compromise can result in a mutually satisfactory transaction for both buyer and seller, but much of that process depends on what method each side uses to arrive at a price.
On the selling side, the plan is to make the price low enough to attract a bevy of buyers, while making sure potential profits aren't sacrificed.
From the buyer's standpoint, the value of a business compared to its posted cost must be assessed. The price paid for a small business can seriously affect months or years of down-the-road profits, so this factor shouldn't be taken lightly.
A Historical Look at Business Valuation. Because so much of the value of a business is tied up in numbers€"revenue, property appraisal, the replacement cost of equipment and inventory, and so on€"and calls for engaging the Internal Revenue Service, someone trained as an accountant (and preferably a CPA, who understands various tax consequences) is in an ideal position to offer valuation services. €A CPA can quickly give you an idea of how taxes will impact the success of the business,€ says Nazarian.
Prior to the 1920s, most businesses changed hands through direct involvement of buyer and seller. The party that proved to be the better negotiator generally won out. A buyer would look at the seller's personal standard of living and community status and make an off-the-cuff determination about his own expected cash flow and profits once the business changed owners.
But prohibition was a major factor in altering the business valuation landscape, because the value of most of the nation's breweries and distilleries dropped like a rock practically overnight. A would-be buyer could no longer base perceived value solely on past profit and loss. The IRS eventually created a formulaic method to determine the value of intangibles and "goodwill" as a means to arrive at the total value of a business. Though the federal agency's motivation was tax-based€"if taxes are involved, the IRS is bound to be on the scene€"the move was ultimately applied to buyer-and-seller transactions as well. €€
In the late 1970s, many U.S. accounting firms began to establish departments that were exclusively involved in determining business values. The intention was to assist in tax and estate planning, but it made sense to also offer this service in sales transactions.
In 1997, the American Institute of Certified Public Accountants, a respected U.S. accounting licensing and trade organization, introduced a certification process that allows members to become licensed as business valuation experts. Members are required to hold a CPA's license, have significant involvement in at least 10 prior valuations, pass an eight-hour written exam, and maintain 20 or more hours of annual continuing education in business valuation to qualify for the designation of Accredited in Business Valuation (ABV). Any accountant whose name is appended with the designations CPA and APV on letterhead and business cards can be considered an expert on the subject, privy to all the up-to-the-minute changes in rules and regulations, and a highly reliable business valuation asset.