Ever buy a loaf of bread for $1,200? Me neither! Know why – because I know what a loaf of bread ought to cost and I won’t pay more. When you buy a business, do you know what it ought to cost? A CVA can help you avoid paying too much because they specialize in knowing what the right value of a business.
In my business, I wear many hats: CPA, attorney, certified financial planner (CFP), coach, consultant, trainer, teacher, boss. You get the drill. One of the hats I wear is that of a CVA: certified valuation analyst. What the heck is that? Essentially, I help businesses determine their sale value of a business. This means I’m helpful for a seller or a buyer because determining actual value impacts both on a variety of levels including reducing risk.
When you hire a CVA, don’t forget to check their reputation and interview them. You want to know how they work, and whether their techniques include the research that is crucial to a thorough evaluation. Try to avoid internet-based companies that may not actually visit the company before they make their recommendation. Business brokers are better, but their focus is usually more on the sale than the value of what is being sold. Your best bet is to invest in a CVA who will know how to make sure you get the best deal.
I’m more likely to look at the transaction from an investor’s point of view before making my decision. In other words, I put myself in your shoes.
When I calculate the value of a business, I must determine the risk level of the business. My preferred strategy is the Ibbotson Buildup Method. In this method, different risk factors are combined one at a time, in layers, to determine the risk of the business. This risk factor becomes the discount rate to apply to the after-tax cash flow of the business. Those individual risk factors are the risk-free rate, the equity risk premium, the size premium, the industry-specific risk premium and the specific company risk premium.
Beginning with the risk-free rate, each of these premiums build upon the previous one, from the most general to the most specific factors in a company’s value. After the specific company risk premium is applied, you’ll have the right discount rate for their cash flow.
There is a great deal more information about this method, determining risk and finding a certified valuation analyst who can offer input that is crucial to the sale or purchase of a business. If you’d like more detailed information, I encourage you to sign up for my FREE e-course: How to Buy a Business. You can also contact me at (505) 516-1777.
by Steven Schlagel