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Why an appraisal is critical to a seller when selling their business
| Guest post by: Andrew Rogerson |
Article Overview: When trying to sell your business, getting an appraisal is beneficial for a number of reasons. Understanding what assets are part of the sale, removing any personal items that aren’t for sale and deciding the worth of your business with a professional ensures success when trying to sell your business. This article outlines the benefits of an appraisal and why it is critical when selling your business.
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Free Download - How to sell a business By Andrew Rogerson |
Why an appraisal is critical to a seller when selling their business
The best approach when selling your business is to make a
list of all the items so there is no confusion about what is being sold. This includes isolating and reporting
individually any real estate, inventory, fixtures, furniture and equipment,
leasehold improvements, as well as assets that are not part of the sale. Additionally, consider making a list of the
current liabilities of the business and against that list, note whether it will
expire when the business changes ownership, stays with the seller or will
transfer to the buyer. Also, a better
idea is to completely remove any personal or special items that will not be
sold as part of business. This removes
any ambiguity and becomes one less tension point in the transaction.
Once this is done, one of the first steps to selling the
business is to get an appraisal on the business as a going concern. If you’re the owner of the business you may
have an opinion about what the assets are worth but that opinion will not be
acceptable to a genuine buyer. The best
approach is to have a third party perform the appraisal for you.
There are a number of reasons to use a third party appraisal
and these include that it provides confidence about the value of the business
and the asking price. It provides an
informed opinion about the business value so the seller can decide if the
asking price will be enough for them to sell the business. Most sellers think their business is worth
more so the valuation keeps the seller real with his price expectations and
hopefully won’t take the business to market if they are not going to get a
price that works for them. A business
valuation also helps the seller see the business strength and weaknesses from a
third party’s perspective and understand their tax situation. That is, the price the seller gets when he
closes escrow doesn’t mean they get to put all that money in their pocket. The IRS wants their tax piece from the
business sale and the business valuation helps informs the seller.
Another two reasons for a business valuation is that it puts
one less strain on the transaction.
There are often many deal points between the buyer and seller in a
transaction. The more deal points and
the more tension in the transaction the greater the chances it will not close
escrow. As price is normally one of the
biggest items, having a reasonable purchase price eliminates any tension and
allows the focus to move to the terms and conditions of the sale. Also, if the business transaction requires
the buyer to obtain third-party finance, the business valuation will help all
parties work through that scenario. Some
lenders will require their own appraisal that they order; others will work with
the third party appraiser if the skills and certifications of the appraiser
meet their standards as well as the quality of the appraisal.
Some final good reasons for an appraisal are that it also
helps and gives confidence to the buyer about the business and any advisors the
buyer chooses to use. The buyer is
always the most nervous party in the transaction as they have the most to lose
personally, financially and professionally.
The greater their confidence the more likely they are to continue with
their inquiry. Sellers forget that
buyers have many options including just saying no and not buying a
business. If you are a business buyer
and you find two businesses that are of interest to you and one has done a
valuation and one hasn’t; which do you think would be more attractive to make
further inquiries about? Same question
but instead of being the buyer, put your feet in the shoes of a lender. A buyer brings you two businesses they want
to buy and need a loan with one having a business valuation and one not, which
business do you think the lender will spend more time considering for a loan?
A business valuation is an important aid to all parties in
the transaction. A business valuation
normally refers to the appraisal of a business as a going concern. If the business includes real estate, this
would be appraised separately from the business. If the business is not currently profitable,
it can still have value if that value is couched in the assets of the business
such as fixtures, furniture and equipment and /or inventory. To appraise these assets a Machinery and
Equipment Appraisal would be used; not a business appraisal.
An appraisal is a great asset to a business
transaction. There is cost and time
required to put the proper document together but this should far outweigh not
getting this done.
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About the Author: Andrew Rogerson RSS for Andrew's articles - Visit Andrew's website Andrew Rogerson is a 5-time business owner that loves helping entrepreneurs sell or buy a business. Andrew currently holds the Certified Business Intermediary (CBI) designation from the International Business Brokers Association (IBBA), the highest designation awarded by the IBBA. Andrew has also earned the Certified Business Broker (CBB) designation from the California Association of Business Brokers (CABB.) He holds a Certified Machinery and Equipment designation (CMEA) from the NEBB Institute and is a Certified Senior Business Analyst (CSBA) with the Society of Business Analysts. Andrew is a member of the Sacramento Metro Chamber of Commerce and past Chair of the Sacramento Chapter of the California Association of Business Brokers. Andrew is also the author on a series of four books: Successfully Sell Your Business, Successfully Buy Your Business, Successfully Buy Your Franchise and Successfully Start Your Business. For more information go to http://www.businesstransactionbooks.com Click here to visit Andrew's website   Successfully buy a business |
Related Forum Posts
I think Craigslist is better than Ebay
- As a relative novice to selling online, I found that Craigslist is a very effective tool. In less than a month, I've sold over $800 worth of my excess tennis gear (which I was planning on getting rid of) and I haven't really lost much from my original purchase price. The postings on Craigslist are very search engine friendly on Google and I feel it's an easier site to use than Ebay (as a seller).
Unlike Ebay there's no seller/posting fees on Craigslist and you're not even limited to selling to "local" consumers. I've had international buyers contact me and pay for the shipping costs. These buyers will pay me first via PayPal, and then I'll simply ship out their product and provide a tracking code (and the parcels are automatically insured for up to $100).
Do any of you have any selling experience on either platform you'd like to share?
Finding problems
- Absolutely Shri-
I can see how someone could come in and find the problems to find out where the owner went wrong in order to turn it around. So perhaps if the business was losing money and the seller held off selling for a while and did something like this so it would look better on paper, a lender would then consider approving the loan for the purchase of said business.
Re: What to avoid when cold calling?
- Good points mentioned.. while selling any product seller must take care of words.
Selling products on ebay
- I've always wondered if it is worth the time investment for the seller - you need to create the listing and make it look good, answer emails from prospective buyers, prepare the package, go to the post office to mail it off, etc.
Unless you are selling a very high ticket item or you are doing a lot of volume and can get some economies of scale, is it something that you can build a business off of?
How do you set a value on a business?
- Hello there!
I have a friend that's looking to sell their business. I would like to know how a business gets valued. Can someone help me here?
Here's some fairlyaccurate numbers:
Gross sales: $153,000 (3 year avg)
Income: $75,000 (3 year avg)
I've heard that there's a ratio that can determine the value. Does anybody know what it is?
The buyer wants to see P&L's. Is their some type of disclosure agreement that protects the seller... How is this typically done? After all, the buyer is a competitor...
Buyer has suggested deposit, then pmt plans. I'm under the impression that this is common practice in the sale of a business. If so, what's the best way to approach this proposition as a seller?
Thanks in advance for your feedback!
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