There can be a number of considerations for small business owners in regards to their leased business space when contemplating the sale of the business.

For a retail or service business, maintaining continuity of physical presence can be valuable for the business after the sale.  With the loss of the current owner’s personal network that has helped to feed the business, the continuity of physical presence can be one factor to continue to bring in business after the transition.  Do you have quality retail or office space that reflects well on the business and that works well for your staff to complete the work that must be done?  Have you locked in a longer-term lease that will permit the future buyer to continue to reap these benefits, including the benefit of continuity of physical presence, after the sale?  If you can’t say yes to these questions, what ground work can you lay now to increase the value of your physical space to a future buyer and thereby increase the value of your business?

For a manufacturing enterprise, to what degree has the company locked in a longer-term lease for space that is built out to meet the needs of the business now?  To what degree can the space accommodate the needs of the business as it grows?  Again, have you locked in a longer-term lease that will permit the future buyer to continue to reap these benefits after the sale?

Alternatively, in your situation are there one or more reasons why a future buyer might value being able to escape your current lease and move the business?  For example, is it likely that you might sell your business to a competitor who might be apt to consider consolidating operations?

It is not uncommon for a small business owner to own the office, retail or manufacturing space that is then leased to the business.  Do you also plan to sell the property to the buyer when the business is sold?  If not, the lease terms may need to be revisited or formalized when contemplating leasing the space to third party ownership after the business sale.

[Legal advice not only involves an understanding of the law, but the application of the law to a particular set of circumstances or facts.  Typically blog posts are imperfect tools to address the subtlety and exceptions of the law that may apply in particular situations.  As a result, the information in this blog post does not represent legal advice.  If you are in a situation where you need or desire legal advice, we would be happy to help.  Call 608-358-9413 to set-up a no-charge initial consultation.]

The infrequency with which most business owners engage business valuators, the potential tax issues associated with a business valuation, the cost of retaining a business valuator, the types of business valuations available, and trying to judge the appropriateness, experience, and work product of a particular business valutor, can make the process of selecting a business valuator imposing to many small business owners.  This blog post is intended as a starting point for small business owners who need to hire a business valuator/business valuation firm.

As a first step when retaining a business valuator, you may wish to consider his or her accreditation or credentials.  In my experience, one accreditation that business valuators will reference is their accreditation with the American Society of Appraisers (ASA).  One accreditation that you may wish to look for in a business valuator is whether or not the valuator is an Accredited Senior Appraiser with the ASA.  An Accredited Senior Appraiser will have five or more years of full-time appraisal experience (or its equivalent).  You can confirm the business valuator’s membership with the ASA by going to the ASA website and searching for the business valuator under the function entitled “Find an Appraiser.”

When comparing business valuators you may wish to consider the following additional questions/issues:

• How many years of full-time business valuation experience does the business valuator have?
• How many business valuations does the business valuator and/or his or her firm complete annually?  What is the typical level of complexity of these business valuations (and how does this complexity compare to the business owner’s situation)?  Of these business valuations, how many are calculation engagements vs. valuation engagements?  [For more information on the difference between calculation engagements and valuation engagements, check out our post entitled Small Business Appraisals–Calculation vs. Valuation Engagements.]
• Business valuations represent what percent of the business valuator’s practice on an annual basis?  Business valuations represent what percentage of the firm’s business on an annual basis?
• What type of business valuation would the business valuator recommend in the business owner’s situation, and why?
• To what degree does the business valuator have experience providing business valuations in the business owner’s industry?
• Are there important factors other than experience, such as service, reputation, communication skills, and education that may put one business valuator ahead of the others?

I would also suggest carefully comparing the pricing and billing approaches of the various business valuators you contact.  In my experience, there can be substantial variation in pricing and billing approaches for business valuation services.

Finally, when comparing business valuators, and when contemplating retaining a business valuator, consider carefully the terms of the contract under which you would retain the business valuator.  Among other substantial issues that may arise, you may wish to consider the following:

• If the business valuator and his or her team are retained on an hourly basis, what protections are in the contract to avoid an unanticipated run-up of hourly fees?
• Are there additional provisions in the contract that could lead to additional costs?  For example, does the contract provide for the possibility that the business valuation firm may retain outside qualified appraisers or other expert services in addition to their own services?
• How does the contract address future services from the business valuation firm that may be provided after the initial business valuation is complete?

There is a lot to consider when retaining a business valuator/business valuation firm.  But the right valuator and valuation can be an important first step in selling your small business or small business interest.

[Legal advice not only involves an understanding of the law, but the application of the law to a particular set of circumstances or facts.  Typically blog posts are imperfect tools to address the subtlety and exceptions of the law that may apply in particular situations.  As a result, the information in this blog post does not represent legal advice.  If you are in a situation where you need or desire legal advice, we would be happy to help.  Call 608-358-9413 to set-up a no-charge initial consultation.]

 

There are three basic approaches that appraisers take to determining the value of a small business interest: (a) cost approach; (b) earnings approach; and (c) market-value approach.  Within each approach, there are multiple methods to arriving at a valuation of a business interest.

The cost approach estimates the value of the business based on the net value of its underlying assets.  Under the cost approach a value is assigned to each tangible and intangible asset owned by the business.  The sum of the liabilities of the business are also determined.  The sum of its assets minus the sum of its liabilities represents the net value of the business under the cost approach.

Under the earnings approach, an appraiser will place a value on the business based on the present value of the future estimated earnings of the company.  An appraiser may look at either a company’s past history of earnings or project future earnings in arriving at a value of the business under the earnings approach.

An appraiser utilizing the market-value approach will determine the value of a company by analyzing the sale price of comparable businesses or the value of publicly-traded stock of companies in the business’ industry.

An objective appraisal will typically be a watershed moment for both buyer and seller in determining the value of a small business interest.  As different valuation methodologies have their advantages and drawbacks, and as each business is unique, an appraiser will often look to multiple valuation methodologies in estimating the value of a business.  While a qualified appraiser best understands the art and science of developing an appraisal, the business owner is the one who most intimately understands the business being appraised.  As a result, it is worth taking the time to carefully review and ask questions when receiving the initial draft appraisal to ensure that the business owner conveys to the appraiser key information about the business that the appraiser may or may not have fully appreciated when developing the initial draft appraisal.  The draft appraisal permits the opportunity for this exchange to occur before the appraisal is finalized.

[Legal advice not only involves an understanding of the law, but the application of the law to a particular set of circumstances or facts.  Typically blog posts are imperfect tools to address the subtlety and exceptions of the law that may apply in particular situations.  As a result, the information in this blog post does not represent legal advice.  If you are in a situation where you need or desire legal advice, we would be happy to help.  Call 608-358-9413 to set-up a no-charge initial consultation.]

It can be very daunting for a small business owner, or a would-be small business owner, to consider buying or selling a small business.  One issue that can be particularly overwhelming is trying to determine the value of the small business.  An appraisal of the business is often the resource that will be looked to by both buyer and seller, to at least establish a starting point for determining the value of a small business.

In retaining a business appraiser, the small business owner will need to decide what kind of appraisal to order, a calculation engagement or a valuation engagement.  A calculation engagement is a less involved business valuation.  While a calculation engagement will use one or more methodologies to estimate the value of the business, the valuator may express no formal opinion or conclusion of business value as the estimate may not be the product of all of the steps that the valuator believes should be undertaken to provide the most accurate or reliable estimate of value.  A valuation engagement, on the other hand, is a well-developed business valuation that should represent the valuator’s most accurate or reliable estimate of value.  In lieu of speaking of calculation or valuation engagements, valuators sometimes also speak in terms of oral reports (least formal and developed), summary letter reports, or full narrative reports (most formal and developed).  Valuation engagements or full narrative reports are often requested when the report is to be relied on by third parties, such as the IRS or a lender.

In considering what type of appraisal to order, it can be worth taking the time to determine what type of report key third parties, such as a lender, may require.  Not surprisingly, a valuation engagement or full narrative report will typically costs thousands of dollars more than a calculation engagement, even for a relatively small business interest.  Sometimes business owners can begin with a less expensive, less formal, calculation engagement, and subsequently upgrade to a valuation engagement if needed.

[Legal advice not only involves an understanding of the law, but the application of the law to a particular set of circumstances or facts.  Typically blog posts are imperfect tools to address the subtlety and exceptions of the law that may apply in particular situations.  As a result, the information in this blog post does not represent legal advice.  If you are in a situation where you need or desire legal advice, we would be happy to help.  Check out our Contact Us page, and feel free to set-up a no-charge initial consultation.]