1. Who can do business valuations?

Anyone! The business of obtaining a business valuation (or business appraisal) is a slippery slope. The industry is not overseen by a regulatory body and therefor, there are many unqualified people and online resources offering “business appraisals” or “business valuations” that provide no or negative value to the consumer.

The first question that must be answered is, “Why do you think you need a business valuation?” A formal business valuation is probably not what you need if you are trying to establish the market value of your business before selling it. For this purpose, experienced professionals with access to current market data and active buyers (like MarketView) can provide the information you need to know. Some business brokers, M&A advisors, and investment bankers are good resources for private company valuations, but they may have conflicts of interest. The truth is that there is no valuation certainty until you close the sale and receive payment.

If you do need a formal business valuation for tax or estate purposes, buy-sell agreements, divorces, lawsuits, etc., then be sure to hire someone with the necessary experience and credentials for the purpose.

There are several credentialing organizations offering varying levels of rigor for earning professional designations, each with its own set of professional standards for members.

It is recommended that if a professional appraisal is needed, that the appraiser follow the Uniform Standards of Professional Appraisal Practice, or “USPAP”, which are promulgated by the Appraisal Foundation.

The most common professional appraisal designations are:

ASA (Accredited Senior Appraiser) – This is sponsored by the American Society of Appraisers. This is a well-regarded designation, particularly in the appraisal of privately held businesses.

MAI (Member of the Appraisal Institute) – This is strictly a real estate credential and is the credential of choice in real estate appraisal.

CFA (Chartered Financial Analyst) – This credential is sponsored by the CFA Institute (formerly the Association for Investment Management and Research or AIMR). While not strictly an appraisal organization (members are primarily securities analysts, portfolio managers, investment bankers, and other investment consultants), but the CFA is relevant to the appraisal field and is difficult to obtain. This is the credential of choice among public company stock analysts and not necessarily relevant for private company valuations.

CVA (Certified Valuation Analyst) – A privately-held, for-profit business sponsors this credential.

AVA (Accredited Valuation Analyst) - A privately held, for-profit business sponsors this credential.

ABV (Accredited in Business Valuation) – The American Institute of Certified Public Accountants (“AICPA”) sponsors this credential.

CBA (Certified Business Appraiser) –The Institute of Business Appraisers (IBA), a private, for-profit business sponsors this credential.

For purposes of selling a privately held business, a formal business appraisal is normally not required nor obtained.

2. What is exit planning?

From the perspective of a business owner, exit planning includes preparing themselves and their business in advance of a sale (or other ownership transfer), with the purpose of achieving the personal, financial, non-financial, timing and legacy goals of the owner.

There are no licenses required to be an exit planner, but there are thousands of professionals (and unprofessionals!) who provide services under the banner of “Exit Planning”.

Several for-profit businesses offer credentials for exit planning advisors and have created standards for their members to follow, but there are no universal standards for exit planning.

At MarketView, we have developed the MarketView Blueprint which combines the most important aspects from the traditional exit planning models with the techniques and resources of sophisticated M&A advisors, investment banks and business brokers.

3. What’s the difference between a Succession Plan and an Exit Plan?

Many people use these terms interchangeably, but for our purposes, they are very different.

An exit plan (See FAQ “What is Exit Planning”) deals with the business owner’s desire to exit the business as owner and from active management in the business.

A Succession Plan has to do with the management of the business, and can apply to all levels of management in the business (not just the owner or CEO). Think of it as an intentional program designed to keep qualified people in every job, including filling gaps caused by events such as the death or resignation of a key manager. A Succession Plan should be included as part of an Exit Plan.

4. When should I start my Exit Plan or Succession Plan?

If you have not already begun, you should start right now! Running a business without an Exit Plan and a Succession Plan is risky business. It subjects the business to avoidable risks and unnecessarily decreases both its valuation and marketability.

5. What does EBITDA stand for?

This is an acronym for Earnings Before Interest Taxes Depreciation and Amortization. EBITDA is commonly used when valuing a business. The value of a business may be expressed as a “multiple of EBITDA”, so a business with $2 million in EBITDA valued at a “5” multiple has an Enterprise Value of $10 million.

Beware: all “EBITDA” is not created equal! When using EBITDA for valuation purposes, it must be clearly defined e.g. “this year’s EBITDA”; “last year’s EBITDA”; “trailing 12 mos. EBITDA”; “three year average EBITDA”; “adjusted EBITDA”.

6. What are typical M&A advisory fees?

You would think that with all of the M&A advisors and investment bankers in the world, competition would result in standardized fees structures, but they don’t!

The closest thing to “standard pricing” is something called the Lehman Formula (from Lehman Brothers) that was used for years by investment banking firms worldwide. It goes like this:

5% of the first $1 million of transaction value, plus

4% of the second $1 million of transaction value, plus

3% of the third $1 million of transaction value, plus

2% of the fourth $1 million of transaction value, plus

1% of everything above $4 million of transaction value

Lehman made things a lot simpler, but unfortunately, the formula is rarely used today. Fees as a percentage of transaction value have generally increased and can vary widely.

Some advisors charge “2X Lehman”, while others charge a flat percentage ranging from 4% to 10% depending on the anticipated transaction value. Others use steps such as 5% of the first $5 million and 4% of the second $10 million. Some even use an increasing scale based on threshold valuations, such 5% up to $10 million plus 10% of the transaction value above $10 million.

As a rule of thumb, Business Brokers (who typically represent smaller businesses) charge between 8% and 10% of the transaction value. They rarely charge a retainer or up-front “work fee”.

M&A Advisors (who typically represent larger businesses) normally charge based on a declining percentage of the transaction value like Lehman, but with larger steps, e.g. 5% of the first $5million, 4% of the next $5million, 3% of the next $5 million, and 2% of anything over $15 million.

M&A Advisors typically charge a retainer or work fee, which is typically around $5,000 per month or a one-time fee up-front. Retainers/work fees may or may not be netted against the transaction fee if the sale is consummated but are not refundable.

Know that broker/advisor fees are ALWAYS negotiable.

7. What are the taxes on selling business assets?

The answer is beyond the scope of this FAQ. The corporate structure of your business (Corporation, S-Corporation, LLC, Partnership, Sole Proprietorship, etc.), the structure of the transaction and other factors impact the type and amount of taxes incurred from the sale of a business. Consult a reputable CPA with an expertise in taxation well before a sale transaction to ensure time to take measures to minimize taxes.

8. What are the taxes on selling business stock?

9. How much are taxes on selling a business?

The answer is beyond the scope of this FAQ. The corporate structure of your business (Corporation, S-Corporation, LLC, Partnership, Sole Proprietorship, etc.), the structure of the transaction (stock sale, asset sale, installment sale, etc.) and other factors impact the type and amount of taxes incurred from the sale of a business. Consult a reputable CPA with an expertise in taxation well before a sale transaction to ensure time to take measures to minimize taxes.

10. Who buys businesses?

Privately-held businesses are sold primarily to individual buyers, corporate buyers (strategic buyers) and private equity groups (financial buyers). Smaller businesses (less than $5 million in revenue) are typically sold to individual buyers. A business with over $5 million in revenue may attract the attention of strategic and financial buyers.

11. Do I need an M&A advisor or business broker?

In most cases, the answer is “yes”. Selling a business is not a DIY project! The process can be long and challenging for a business owner and management team-even with the assistance of a good advisor. Attempting to sell a business without proper assistance can be disastrous.

Make sure you hire the right advisor for your business. Depending on the type and size of business, you will need either an M&A Advisor or a Business Broker.

12. How do earnouts work?

An earnout is a portion of the purchase price of a business that is contingent on future performance of the business. In general, buyers love earnouts and sellers hate them. An earnout is a way to transfer risk from the buyer to the seller. It is also a tool used to bridge a value gap between buyer and seller.

Earnouts can come in many different forms. They can be tied to top line revenue, gross profit, net profit, EBITDA or any number of other financial metrics.