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Considerations in Selling Your Business- Part 3: Selecting a Valuation Firm

by Patrick B. Mathis, Shareholder at Mathis, Marifian and Richter, Ltd.

Selecting a Valuation Firm

As noted in Part 2 of this series, the valuation of the business is an important consideration when selling your business. In determining the value of your business, you should carefully consider and select a qualified valuation advisor to perform this analysis.

iStock 3281204 LARGEMany types of firms conduct these valuations, including valuation groups within accounting firms, business appraisal firms, investment banking firms and business brokers. In addition, experienced attorneys and accountants, while not performing full-blown appraisals, can often provide useful insight into the analysis of the value of a business.

In selecting an appraiser, sellers should solicit recommendations from their attorneys and accountants as well as other sources, interview the appraiser, outline the scope of the engagement (i.e. will this be a comprehensive detailed appraisal or a valuation without a detailed written discussion of the business, national economy, local economy, etc. which may be unnecessary for the seller’s purposes), and obtain a fee proposal.

To prepare to select an appraiser, gather and review the prior five years' financial statements and tax returns for the business so that you are prepared to discuss these with the appraiser. In many cases reviewing these documents, as well as other relevant background information, with the company’s accountants and attorneys may greatly facilitate the valuation process. For example, a written description of the business operations, suppliers, customers, key product areas, the competitive market, and related information will provide valuable background information to the valuation firm.

Sellers should also consider the industry and potential buyers and discuss these items in detail with the appraisal firm. For instance, if there has been substantial merger and acquisition activity in the industry, such as one or two national, publicly traded industry players acquiring smaller firms, the appraiser should be made aware of this activity. In many cases, the valuation firms may be able to secure and analyze information regarding these acquisitions to determine valuation approaches used by those acquiring companies in making prior acquisitions. This information may show that the buyers have been paying premium prices in the competitive environment as they attempt to consolidate the industry.

On the other hand, a business which has a relatively local market and no potential outside buyer, may be valued based upon the anticipated return on a buyer’s investment, but factor in the anticipated increase in earnings for a local buyer who may be able to consolidate operations, eliminate a competitor, etc. The appraisal firm, in analyzing these values may then factor reduced operating costs and resulting increased profits for a buyer into the valuation approach.

It is important to find an appraiser that fits your specific needs when preparing to sell your business.

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