When It Comes Time To Sell Your Business, Get a Professional Valuation

Small business valuation calculator

If you own your own business, you will likely need to consider selling it at some point. You will retire at some point, and you could need to sell before then because of financial hardship, illness or another reason. Even if you are just selling the business to an employee or a relative, you need to know what it is worth so you can be fairly compensated. To get an accurate business valuation, you may need to avail yourself of business valuation services.

What your business is truly worth may be more or less than what you believe it to be. If you have an inflated opinion of your business valuation, you may set the price way too high and not be able to sell it. If you think your business is worth less than what it really is, then you could wind up leaving money on the table. Neither of these situations is ideal, and they can be avoided by using the expertise of business evaluation services to get small business valuations.

When looking to value your business, a valuation professional is likely to take one of three approaches. He or she might use comparable sales of other businesses, take the value of the assets or look at the potential for future sales and weigh it against the risks. In some situations, your valuation professional may use a combination of two or more of the factors to come up with a price. What type of business you have can influence what method to use as well. For example, for an online service business, it would make much more sense to use a valuation income approach to look at prospects for sales. On the other hand, a manufacturing business with lots of expensive machinery may be better off being valued based on its assets.

At a minimum, you can expect to need to show your valuation expert about three to five years worth of balance sheets and income statements. You might also be asked for client lists, an inventory of intellectual property and other documentation that might show the worth of intangible assets.

Keep in mind that selling your business is more of an art than it is a science. Even if you have a firm grasp on assets and sales, it still comes down to whether you can find an interested buyer, and you may have to decide whether you want to get your business sold for less than you expected or hold out for a certain price while facing the risk of not selling your business at all. For more information see this.

The Challenges of Conducting a Business Valuation for a Bank

Small business valuation software

Conducting a business valuation for a bank can be particularly difficult. The financial statements of banks are unique and unlike those of other industries. As such, determining the company valuation of a bank takes an unique approach.

The financial statements provide many key inputs to the business valuation process. The two most important statements needed are the income statement and balance sheet. Banks use mark-to-market accounting whereby assets and liabilities are carried at their fair market value. The result of this is that what would be unrealized gains and losses in another industry are actually realized on a bank’s financial statements.

Another key difference between the balance sheets of banks and operating companies is that banks do not distinguish between short and long-term assets and liabilities. Most of a bank’s assets are cash and cash equivalents, including cash kept on-hand in the company vault, deposits held at other banks, and any Fed Funds sold. Other assets may be investments securities or loans. Liabilities, on the other hand, are primarily deposits but may also include any Fed Funds the bank purchased.

A bank’s balance sheet can be particularly confusing because unlike in other industries where cash is the byproduct of selling products or services, for a bank, cash is both the raw material used to generate revenue and the final product. As such, bank balance sheets don’t have items such as inventory, trade receivables or property, plant and equipment. Instead, banks’ balance sheets have items such as loan losses, investments, and trading portfolio.

One method of conducting a business valuation is from the business’s earning power and risk assessment. To determine a bank’s risk assessment, the best place to start is the balance sheet where you can evaluate the loan-to-deposit and loan-to-asset ratios. A high value on either of these ratios signals a bank with higher liquidity risk. A bank with low loan-to-deposit or asset ratios, on the other hand, poses a lower liquidity and credit risk. Keep in mind when using these ratios as a business valuation tool, however, that with lower risk comes lower potential reward. A bank with low loan-to-deposit or asset ratios also has a lower earning power.

Another place to assess risk on the balance sheet is through the bank’s capital. Capital is essentially the “cushion” that will help banks absorb any losses or expand its assets. Banks must abide by certain regulations in terms of the minimum size of this cushion.

In addition to evaluating a business’s earning power and risk assessment, there are two other primary means of business valuation: through a comparison to similar businesses or based on the business in question’s assets. The former is known as the market Approach to business valuation while the latter is simply the asset approach.

Under the market approach, you will need to determine the best banks for comparison. This can be a deceptively hard task. The U.S. has 5,338 commercial banks. These range from large financial institutions to smaller community banks. The best competitor to use as a company valuation tool will depend on a number of factors such as:

  • The size of the bank
  • The location of the bank
  • The bank’s profitability
  • The bank’s loan composition
  • The bank’s growth

After applying these criteria, you will ideally have a small pool of banks with similar asset levels and return on equity rations who operate in the same region as your bank and have similar financial statements.

If you opt to use the asset approach to bank business valuation, it’s important to understand how bank’s assets differ from operating companies. As mentioned above, a bank’s assets include cash kept on-hand in the company vault, deposits held at other banks, and any Fed Funds sold. Loans are the primary asset for most banks because they earn more interest than most securities the bank owns and thus provide a better source of revenue. Bank assets also include tangible items which can be sold for cash such as buildings owned by the bank.

Regardless of the business valuation tools you apply, it’s important to start with a solid understanding of the banking industry and how banks differ from operating companies. The unique way in which banks measure their business on their financial statements requires unique business valuation services and methods.