brokerDealerAn Indianapolis business valuation in preparation for a sale requires multiple steps to get an accurate value. In a previous KLP posts, we’ve explored how valuation skills are needed to prepare income statements and balance sheet adjustments before a business analyst can leverage market guides to determine the value of the business.

The next step is to use business valuation skills to perform typical ratio analysis between the business to be sold and the market guideline firms. These ratios for business to be sold vary from the typical business valuation because it will scrutinize both strengths and weaknesses.

A recent QuickRead article by Lone Peak Valuation Group principals Rick Hoffman and Jeff Pickett outlined different purposes of evaluating the strengths and weaknesses.

Strengths.  These are areas where the company is stronger than its immediate competitors.  These areas should be analyzed to understand why this strength occurs and whether they are sustainable.

  • If an intellectual property attorney identifies processes that can be protected with patents, trademarks, etc., the broker should be informed of this strength and the company should consider ways to protect the IP and maximize its value.
  • Strengths may also be the result of financial structure.  “For example, a firm may have a capital structure that utilizes less debt than its competitors, holds larger amounts of cash, owns buildings that competitors rent, etc.,” Hoffman and Pickett stated. “These differences cause firms to be worth more mostly because of the theoretical options the owners have because of this largesse.  For example, a company with little or no debt is expected to be able to go get a loan like its competitors.  Cash-abundant firms can issue a dividend.”

We recently explored how identifying weaknesses  early in the pre-sale process can help increase the firm’s value. In the meantime, you can start to proactively prepare your business for sale by calling us today for an Indianapolis business valuation.