Getting the right value for a business is essential, regardless of the reason why you are doing an appraisal.
Whether you are selling or buying a business, if it’s a partner buyout, buy/sell situation or a civil matter such as divorce or litigation – or any other reason – having a defensible valuation is essential.
Having a trustworthy and independent business valuation gives you the best possible baseline for your settlement, negotiations or decisions.
Still, far too many business evaluation services fail to make a realistic appraisal.
At Nielsen Valuation Group we believe that business valuations far too often are overly simplistic. A lengthy written report with background, methodology, figures, and tables surely looks professional.
But once you dig deeper, hire an opposing expert, more information surfaces. Many business valuation services on the market, are good at proving that they have done a comprehensive job in writing their valuation report. However, looking closer at the report, one will find that most of it can be copy and paste, and general information, that is not specific for you.
As a business valuation expert, we know that analyzing the books will always be at the core of any business appraisal. But we also know that discovering the true value requires us to walk the extra mile.
For us, this means:
1. Offering bespoke business valuation services
Small business valuation services can be very different from appraisals of mid-sized or large-cap enterprises. Just because they are different – and because their needs are different.
Before we start assessing a business, we always make sure that we have the complete background of:
What kind of business is it?
What is the size of the company?
What is the purpose of consulting us as a valuation advisor?
Knowing this is essential for being able to offer you the correct scope of our analysis.
2. Choosing an appropriate method
Not all businesses can be evaluated with a single simple template. Knowing which method to use, how and when is essential for getting the right inputs to start with.
Should you use the income approach, the asset approach, the market approach – or a combination of these? We know the best valuation method for every situation.
3. Normalizing the financial statements
Much of the difference between a superficial and a correct business appraisal lies in the normalization of the financial statements.
Nielsen Valuation Group never takes the face value of numbers. Book value rarely reflects real market value.
Knowing how to correctly normalize the income statements and the balance sheet is essential in getting the right inputs for a business valuation. Doing this can be compared to traditional craftsmanship – and it is one of our strengths.
4. Looking at the facts on the ground
Among all business appraisals, you will be surprised how many of them were concluded without the advisory firm even trying to understand the chain of command of the business, or how its operations actually work.
Not to speak of paying a visit to the company, interviewing key staff, and looking at the facts on the ground.
Writing 20 pages about key-person discounts or how the market is expected to develop in the coming ten years might look impressive. But it is of no use if you haven’t actually understood the role of key persons in the company under evaluation, or how important processes in the company function.
Our search for truth and details is another example of why we believe our company valuation services give a more precise estimate.
Make a business valuation today!
Nielsen Valuation Group is a certified business valuation firm operating nationwide. We offer professional valuation consulting with high integrity – and always bespoke.
Business valuation services are companies offering business appraisals – analysis of the value of a company. What it is worth right now.
Nielsen Valuation Group is one such independent expert operating in the US and overseas.
Let us look closer at various aspects of business appraisals.
What is a business valuation?
A business valuation is an assessment of the value of a company by an accredited and qualified appraiser using one or more valuation methods to get as an accurate estimate as possible.
There are several methods to estimate the value of a business. We will soon look into these.
Why use a business appraisal service?
At Nielsen Valuation Group we cannot emphasize enough the importance of using an independent appraisal service for determining the company valuation.
Some good reasons include:
Knowing what method to use: Valuation is not simply about applying a multiple to earnings or revenue. To start with it is about knowing which of all appraisal approaches to choose in the current situation.
The need to normalize the financial statements: You will most certainly always need to normalize the financial statements to reflect the real value of assets, liabilities, and cash flow. Failing to do so will lead to a radically deceptive valuation.
Investigating facts on the ground: Financial statements and company books are the basis of any valuation but can rarely be used as the sole source for an appraisal. At least if an accurate valuation is what you are looking for.
Experience: There are many pitfalls to avoid. An expert knows them all, giving you a more accurate appraisal.
Knowledge: All truthful business evaluations require a significant number of calculations. For example, trying to make a discounted cash flow analysis and missing out on just one parameter will lead to a completely failed valuation.
Negotiation power: Having consulted an independent and professional business appraisal company will undoubtedly lead to a better negotiating position compared to having used an uncertified valuator or – worse – having done the appraisal yourself.
Compliance: Sometimes, a business appraisal is required by law, regulations or in court. In such instances, you will need a certified business valuation firm to help you out with the appraisal.
How much does it cost to get a business valuation?
The cost of business valuation services varies widely between business valuation firms and the scope of the appraisal. Roughly, most assignments (among all valuation advisory services in the US) cost between $3,000 and $20,000.
Our philosophy is to not cover aspects of the valuation that are irrelevant to your specific case. Many firms will try to convince you to pick the “big package” because it is supposedly better. We don’t think so.
Not to speak of the copy-paste “fluff” that just makes a meager report disguise as a professional one. We don’t do that.
With Nielsen Valuation Group you always receive a customized offer, bespoke service and a precise valuation – tailor-made for your case.
Doing a business valuation is usually not a lengthy process. A skilled and certified consultant will know what to look for and how to do the math.
Filling out the Excel sheet requires little time. The normalization of the financial statements and possibly also conducting interviews and investigating the “facts on the ground” is what takes time.
Another factor to consider is the availability of the appraisal company to take on board new assignments.
When you use our services, we are usually able to deliver a full appraisal within one to two weeks after you contact us, depending on the assignment.
How do I get a valuation of my business?
There is no simple answer to what a business is worth. Yet, “it depends” is not an answer anybody likes to hear.
To answer the question of what a valuation of a company is, you would need to use a qualified business valuation consultant who can independently assess the value of your business.
There are many “rules of thumb” out there. For instance, a business is usually worth two- two three-times its earnings. While such calculations might satisfy your curiosity, consulting an expert is the only way to get a well-weighted and accurate business valuation.
There are many ways to value a company, not just a handful. But usually, business valuation companies and other experts talk about three main methodologies.
Knowing which approach to use, how and when often distinguishes good valuation advisory companies from less precise ones.
These are the most common ways to value a small business:
Let’s take a closer look at these approaches and see what they mean when you choose among company valuation services.
The income approach is the most widely used valuation method. As the name suggests it is based on how much income there is in the business, usually defined as earnings or cash flow.
All else being equal, a higher expected income and a lower risk justify a higher valuation. But it is never that simple in practice.
There are mainly two subsets of valuation types within this approach:
Direct Capitalization or Earnings Capitalization – a single-period method
Discounted Cash Flow (DCF)– a multiple-period method
Direct Capitalization is usually based on The Build Up Method or CAPM to decide the capitalization rate of the business.
Some business appraisal firms use trading multiples derived from publicly traded companies. That is then called the Guideline Public Company Method, which actually is a subset of the market approach, which we will look at soon.
In both cases, we are talking about deciding a multiple that will be positively correlated to expected growth and negatively correlated to risk. This multiple is applied to the company’s income to set its value.
Discounted Cash Flow
The other commonly used income approach method is called Discounted Cash Flow or simply DCF.
You might be familiar with it since it is widely used by star investors such as Warren Buffet as a tool for investing in publicly traded companies. But it is frequently also used by business valuation companies in estimating the value of private companies.
The method is used for modelling near-term growth revenues and expenses (projected future cash flows).
A discount rate is used to turn expected future cash flows into a present value. Business risk, company size, market risk, financial leverage and many other factors are considered to determine the discount rate.
Finally, the value is discounted by the so-called terminal value, the value of the company into perpetuity.
Regardless of the choice of income approach method, the financial statements need to be normalized, adjusting for irregular and non-representative income and expenses.
When to use the Income Approach?
The income approach is a suitable valuation method in most cases. That is also why it is the most widely used of the three main approaches.
There are actually only a few cases where it is not suitable. One such scenario is one-man businesses, where the whole business is based on the work of one person. It is also not suitable as a valuation method ahead of business dissolution.
If the business is an investment case that needs to raise capital, there is no doubt that using the income approach is more appropriate than for example the asset approach (which we will look at next).
Service companies and other companies with high intangible values also benefit greatly from this type of business valuation.
But there is undoubtedly also an element of speculation in the income approach, which implies a certain level of risk in the valuation itself. This is especially the case when using the Discounted Cash Flow method.
The asset approach is based on a calculation of the value of a business’s net assets.
When using the net asset value method, as it is also called, data from the company’s balance sheet is used. The book value of assets and liabilities.
An overly simplistic application of the method would imply subtracting the liabilities from the assets.
In practice, business valuation services must look beneath the surface because the net value of the company is rarely equal to the book value. The balance sheet needs to be adjusted – normalized.
For instance, reported assets often differ from the actual market value. The book value of machines, vehicles or real estate might be higher or lower than the actual market price.
The same holds true for liabilities.
When to use the Asset Approach?
The asset approach is a widely used valuation method among business appraisal services. While it certainly can be used for any company valuation, a business is usually worth more than its assets.
The ideal scenario for when to use the asset approach only, or mainly, is for sole proprietorships. One-man businesses are commonly highly dependent on the owner for running and developing the company. Any future value creation in the company will require a new owner to step into his or her shoes. Therefore, the market value of such a company usually equals its net assets.
Another situation when the asset approach is a suitable method is ahead of the liquidation of a company. A firm that will be deregistered has no more value than its net assets (minus the costs for the dissolution process).
That said – the asset approach may be used to better reflect the true value of any business when combined with another business valuation method, such as the income approach. When doing so the two methods used are weighted to obtain a well-balanced valuation reflecting the intrinsic value of the company.
The third valuation method frequently used by business valuation experts is the market approach. It is a way of determining the value of a company by looking at market valuations of similar businesses.
The market approach requires a large amount of data on recent transactions. Such information is mostly fetched from databases with historical transactions. Unfortunately, such datasets are rarely as complete as necessary to make an accurate estimate of the value of the business.
This method can be performed in one of two ways:
Guideline public company method
Guideline transactions method
The guideline public company method
This market approach method uses data from similar companies within the same industry, but they are publicly traded on an exchange.
The idea is that their multiples will also apply to a private company.
Data is often obtained from databases such as Bloomberg, TagniFi and Capital IQ.
A business appraisal company using this market approach method will have to make various considerations and adjustments for risk, size and other factors that can affect the valuation.
Often it is almost impossible to get any reliable valuation based on the guideline public company method due to the vast differences between public and private firms. There are for example often significant differences in size and geographical diversification.
Or simply because there might be an insufficient amount of similar public companies to compare with.
The fact that public companies areoften traded with a premium to private companies and because of the high volatility of market prices, this method can be difficult to apply in practice.
Guideline transactions method
The option for business valuation services wanting to use the market approach is to apply the guideline transactions method instead. It is similar to the guideline public company method but relies solely on transactions in mergers and acquisitions (M&A).
The main difference here is that transaction data is derived from a single transaction, a stark contrast to the daily share price changes of public companies.
Data is extracted from databases also in this case, such as BizComps, Pratt´s Stats, Done Deals, BVR and more. Importantly, here there is the option to look at public and private companies separately. Often, mergers and acquisition data stemming from similar private companies is a better benchmark for determining the value of the company.
When to use the Market Approach?
While the market approach might appeal with its non-fuzz reality-based valuations, a general lack of data despite extensive databases is often the main concern.
A second challenge is to apply that information to the specific company in question. Differences and company specifics often warrant a different valuation than the one of the average similar business, to a degree where such adjustments become very challenging to execute.
That said, the market approach is often the method of choice by business appraisal services wishing to evaluate local businesses such as restaurants, bars, brick-and-mortar retail stores and similar.
Essential to normalize the income statement before the valuation
Regardless of the choice of method, theimportance of normalizing the income statement before making any calculations cannot be emphasized enough.
What this means is to “cleanse” the numbers from non-recurring and unusual items such as for example gains from a sale of an asset, one-time legal settlements, restructuring costs or life insurance proceeds.
It can also mean adjusting for discretionary items such as compensation to owners working in the company. The owners might be getting a salary below the market rate. Or compensation in the form of an expensive car or yacht, which could not have occurred in a publicly traded company.
How we can help – About our business valuation services
Nielsen Valuation Group is an independent provider of business valuation services. We offer bespoke company appraisals for:
Buying or selling a business
Mergers and Acquisitions
Litigation and partnership disputes
Bankruptcy and business liquidation
Project finance advisory
We operate across the US but have local operations in:
How can I find a business valuation service near me?
Nielsen Valuation Group operates from Austin, Texas, but we have national coverage. You are welcome to contact us at [email protected] for a quote.
Can a CPA do a business valuation?
While some CPAs can do a business valuation it is good practice to contract a business valuation expert instead. They enjoy the advantages of being credentialed and independent as well as having the specific experience required for conducting accurate appraisals.
How much is a business worth with $1 million in sales?
It depends on various factors, including its profitability, growth, industry, and business structure. As a rule of thumb, most companies are often worth between one and five times their annual sales, which means a $1-5 million dollar valuation.
Who pays for a business valuation?
In most cases, the buyer pays for a business valuation, not the seller. There might also be other reasons for doing an appraisal and who pays in such instances varies depending on the situation.
How many times revenue is a business worth?
It depends on many parameters, such as growth, kind of business and profitability. Typically, the valuation multiple for sales is 1 to 5, meaning the company valuation is 1 to 5 times its revenue, but this is only a rough rule of thumb.
How much can I sell my business for?
Most small businesses sell for between two- and three times earnings. For how much you can sell yourbusiness depends on a variety of factors, which is why an independent business valuation advisor will come in handy.
What multiples do businesses sell for?
What businesses sell for varies greatly between industries and companies. Most businesses, however, sell for 2 – 3 times their earnings.
How do you value a business quickly?
There are no quick valuations but looking at the earning or revenue multiples of what similar businesses have sold for can give an indication of what your company is worth.
Want to go with a cheaper option or even do the valuation yourself? Nothing is stopping you, but...
You may lose the lawsuit, due to the valuation failing to be waterproof.
You may never settle the conflict, hurting the relationship with your counterpart.
You may get deceived while entering or exiting your partnership.
Tell us how we can help you
Serving businesses nationwide – We meet all clients in Texas, Florida, California and New York in person. Contact us now and get 30 min free initial consultation. Please fill in as much information as possible.