Selling a business in California requires a business valuation. Business sellers often ask, “Why is an appraisal critical to a Seller when selling their business?”
The best approach when selling your business in California is to list everything that’s part of the business and is for sale. This way, there is no confusion about what is and isn’t for sale. This includes isolating and reporting any real estate, inventory, fixtures, furniture, equipment, leasehold improvements, as well as assets not part of the sale.
Additionally, consider listing the business’s current liabilities and noting whether they will expire upon the company’s change in ownership. Liabilities that remain with the Seller or are transferred to the Buyer should be noted. A better idea is to remove any personal or unique items that are not part of the business sale. This eliminates any ambiguity and becomes one less point of tension in the transaction.
Once this is done, one of the first steps to selling the business is to get an appraisal of it as a going concern. If you’re the business owner, you may have an opinion about what the assets are worth. However, that opinion will not be acceptable to a genuine Buyer. The best approach is to have a third party perform the business valuation on your behalf.
Importance of a third-party appraisal
There are several reasons to use a third-party appraisal, including that it provides confidence about the value of the business and the asking price. It provides an informed opinion about the business value.
Consequently, 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. Therefore, the valuation keeps the Seller realistic with their 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 its strengths and weaknesses from a third party’s perspective and understand its 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 its tax piece from the business sale, and the business valuation helps inform the Seller.
Another reason for a business valuation is that it puts less strain on the transaction. A transaction typically involves numerous deal points between the Buyer and Seller. The more deal points and tension in the transaction, the greater the chances it will not close escrow.
As price is usually one of the most significant items, having a reasonable purchase price eliminates any tension. This allows the focus to move to the terms and conditions of the sale.
Additionally, if the business transaction requires the Buyer to obtain third-party financing, the business valuation will help all parties navigate that scenario.
Some lenders will require the appraisal that they order. Others will work with the third-party appraiser if the appraiser’s skills and certifications meet their standards, as well as the quality of the appraisal.
An accurate Business Valuation not only helps the Seller but also the Buyer and any third-party Lender.
Some final good reasons for an appraisal are that it also helps and gives confidence to the Buyer about the business and any advisers 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 their inquiry.
Sellers often forget that buyers have many options, including simply saying no and not purchasing a business.
If you are a business Buyer and you find two businesses that interest 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 needs a loan. One has a business valuation, and the other does not. Which business do you think the lender will spend more time considering for a loan?
A business valuation is a crucial aid to all parties involved in the transaction. A business valuation typically 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 it is part of the assets.
For example, Fixtures, Furniture, Equipment, and inventory. To appraise these assets, a Machinery and Equipment Appraisal would be necessary, not a business appraisal.
An appraisal is a valuable asset in a business transaction. Putting the proper report together requires cost and time. However, this should far outweigh not getting this done.
If you would like to know the value of your business or simply get more information, click this link to get a free sample of a Broker’s Opinion of Value – Sample business valuation.
For more immediate help, you are welcome to send an email to Andrew Rogerson or give me a call at toll-free (844) 414-9700