Valuing a Business for Purchase
Are you interested in buying a business or selling a business? If so, placing a business valuation for a purchase near the top of your priority list can strengthen your decision-making. Whether you are a business owner looking to sell or an individual hoping to buy, a professional valuation can help you. Valuing a business for purchase provides valuable insights and analysis of a company that can help the transaction process. In this article, we will discuss the key elements of a business valuation for a purchase and why they are important.
Peak Business Valuation, business appraiser, values hundreds of businesses for purchase every year. We support businesses of various sizes across the country. If you are looking to buy a business or sell a business, it is important to work with a professional business appraiser such as Peak Business Valuation. Our team of experts can help you understand business valuation for a purchase and guide you through the process. Start today by scheduling a free consultation with the button below!
Different Uses of a Business Valuation
There are many different uses for a business valuation. The most common uses are gift and estate, litigation, employee stock ownership programs, and transactions (purchases). Valuing a business for purchase varies slightly from the other uses. Furthermore, appraisers can adjust a business valuation for a purchase to match the terms of the purchase agreement and the included assets and liabilities. While the underlying valuation for each of these uses is similar, it is important to understand the differences between them.
Business Valuation for Stock and Asset Purchases
One of the key differences between the previously listed valuation uses and valuing a business for a purchase is the transaction type. A business purchase will be either a stock or an asset transaction. We break down each deal structure in the following sections. See Structuring a Business Transaction for more information on stock and asset transactions.
Stock Purchase
A stock valuation values 100% of the business, including all assets and liabilities. This includes any assets or liabilities considered “non-operating”, unless the purchase agreement states otherwise. A stock valuation can also value ownership levels less than 100%, such as the case of a partnership buyout. A stock valuation will also include adjustments for excess or insufficient working capital according to the company’s balance sheet.
Asset Purchase
A typical asset valuation includes fixed assets, intangible assets, and a normal level of inventory. Other assets, including cash and accounts receivable, are typically excluded along with all liabilities. Similar to a stock valuation, adjustments are made for insufficient or excess working capital. It is important to note that asset valuations are only used when 100% of the business transacts.
Peak Business Valuation, business appraiser, is happy to provide you with a business valuation for a purchase. We work with hundreds of business owners and individuals across industries every year. Peak can help you understand how valuing a business for purchase can help your purchase process. Start now by scheduling a free consultation to connect with one of our professional business appraisers!
Adjustments and Normalization
One of the most important elements of valuing a business for purchase is the adjustments and normalizations included in the valuation. Appraisers make these adjustments to the business’s cash flow to account for non-business revenue or expenses. Read Common Valuation Adjustments to learn more!
Interest, Depreciation, and Amortization
The first items added back to the cash flow of a business are interest, depreciation, and amortization expenses. Businesses record depreciation and amortization as expenses for tax purposes only, and they are not true business expenses. Company management controls interest expense at its discretion. As such, it is added back to the cash flow of the business.
Discretionary Spending
Many business owners run personal expenses through the business. These expenses can include personal travel, auto, telephone, utilities, insurance, and more. Any expense that is a personal expense and not truly a business expense is added back to the cash flow of the business.
Fair Market Rent
If a company owns the real estate from which it operates, a fair market rent adjustment may be necessary. This adjustment will take the fair market rent from a real estate appraisal or industry data and apply the difference to the company’s cash flow. This adjustment may result in either an increase or a decrease in cash flow, depending on the amount of rent paid. If a business leases the property from a third party or is already paying fair market rent. In those cases, the valuation remains unchanged.
Ownership Replacement Salary
Owners typically pay themselves based on what the business can afford, not based on the value of the services performed. An ownership replacement adjustment includes adding back the salary of each owner and making a deduction for the fair market wage of a replacement employee. If the owners are not involved in the business operations. No salary adjustment applies when owners do not participate in daily operations.
Approaches for Valuing a Business for Purchase
Expert business appraisers use several valuation approaches when valuing a business for purchase. The most common are the income approach, the market approach, and the asset approach. Different approaches may be used depending on the company and industry. A valuation analyst typically uses a combination of approaches to find the fair market value of a business. The income and market approach are widely applicable, while the asset approach is used for asset-heavy or reduced cash flow businesses. Check out Methods to Value a Business to learn more about each approach.
Conclusion
Valuing a business for purchase can be complicated. Many different adjustments, approaches, and analyses must be considered. However, obtaining a business valuation for a purchase can provide you with the information you need to complete a successful purchase.
If you are looking to obtain a business valuation for a purchase, it is important to work with a professional business appraiser. Peak Business Valuation has the expertise and qualifications to provide you with an expert valuation. Whether you are looking to sell a business or to buy a business, Peak is happy to provide you with a valuation. Start today by scheduling a free consultation below!
