Many of our contacts ask us how we arrive at an Opinion of Value for the purpose of listing a business for sale. That issue is discussed below, but first it should be noted that seldom, if ever, do we prepare an Opinion of Value where there is little or no opportunity to obtain a contract to sell the business (i.e., a listing). We are primarily marketers of businesses – we are not “certified appraisers.”  Therefore, we do not undertake an Opinion of Value where the prospective client seeks an opinion related to partnership dissolution, marriage dissolution, stock value determinations, and the preparation of valuation information for litigation purposes. Many of our colleagues within the accounting and business consulting professions specialize in these areas, and some have special certifications related to them (e.g., Certified Valuation Analyst – CVA – for accountants).

In arriving at an Opinion of Value for our purposes, our approach focuses on justifying a fair sale price for the business owner and, at the same time, crafting a proposed value that leaves a prospective purchaser with a business that:

(1) Has the ability to pay the new owners a market salary;

(2) Has the ability, following a down payment, to cover any remaining debt service over a reasonable amount of time; and

(3) Has sufficient remaining discretionary cash flow to advertise, promote and grow the business in the long run.

Our experience tells us that if these three elements are not in place, the business either does not get sold, or the purchaser becomes disenchanted and abandons the business in one year to 18 months. In either case, these events usually lead to a great deal of seller dissatisfaction. To have a successful sale, businesses must be priced accurately and reasonably for the current marketplace, and any sale transaction must be structured in such a way that the deal will last over the long haul.

The process for our Opinion of Value begins with the initial meeting and interview with the owners. At or following the meeting, owners provide us with three to five years of financial information for the company. Usually this occurs in the form of federal tax returns for the company, plus any interim statements that the company may have for the most recent quarters. They also provide us with current information regarding the company’s inventory, at cost, and the company’s equipment, furniture and fixtures, all at replacement cost. We also incorporate values for any real property, if any, owned by the company and intended as part of a sale. All financial information that is shared with is kept in the strictest of confidence.

After our review of this information, we convert it into our own worksheets and begin to analyze it, comparing year to year. We look for telling trends in the operations, and we look for non-recurring expenses, non-cash items, unnecessary expenses, and expenses that are mostly personal to the ownership. This effort usually leads to adjustments, which tend to enhance the Net Operating Income for the company. This effort also leads to questions about specific line items and operations in general. These questions are resolved in consultation with the owners or other designated persons, such as the company’s Chief Financial Officer or CPA firm.

The result of this front-end work is a weighted number, which represents the company’s Adjusted Net Operating Income over the period that was reviewed. In our calculations, we give the most weight to the most current years of operations. Once this number is agreed upon, we employ it in three to four different valuation models that we frequently use. These models take into consideration various risk factors, asset value estimates, goodwill value estimates, cash flow estimates, cash on cash return, etc. The final result is a range of possible values for the business. We then review and weight the results of each model. Based on our experience in the marketplace with various types of businesses, we assign the most weight to the respective model that best fits the type of business that we are working with.

The end result is a single, proposed value for the business, which we would be prepared to use and defend in the marketplace. This number may be modified even further for various factors that could justify the application of discounts or premiums regarding the business. Such factors could include a dramatic change in the local economy, upcoming technological changes affecting the industry, skilled labor shortages, upcoming changes in competition, major management shifts, and major regulatory changes, to name just a few.

During a subsequent meeting with the owners, this number is presented in writing, and explained in detail, as our firm’s Opinion of Value. Our opinions are not cast in stone, and our experience tells us that every business is different. Naturally, we are open to debate over our methodology, and to a discussion of any overlooked factors that may affect the proposed value. It is an iterative process between each owner and our firm.

Our overall goal in this process is to arrive at a number that the owner is comfortable with and, at the same time, positions the company in the top 25% of deals available in the marketplace. Since many prospective purchasers are looking at more than one business at a single point in time, it is best that the agreed upon price spark enough interest in each prospect’s mind that they will put the business on their “short list” for further review and possible purchase.