Many small businesses utilize leverage to invest in value-creating projects, fund operations during down years, etc. Often times, this leverage may exceed the credit available based on the business’s fixed assets alone. In some cases, the financial institution may be willing to lend against the company’s goodwill, which is identified in the process of a valuation. The ability, then, of a small business to borrow based on the value of the goodwill may expand the universe of value-creating investment options available to the owners. Periodic valuations may establish a track record of value which could be used to facilitate a recapitalization of the firm, enabling owners to further seek value-creating projects, distribute funds to the shareholders via special dividends, etc.
In addition, an independent valuation from an appraiser not affiliated with the business broker or any of the business’s other advisors provides an objective opinion of value that is useful in negotiating a transaction price. An independent valuation gives the acquirer of the business a level of confidence that the value conclusion is not biased by the owners or their advisors. This is extremely useful when negotiating transactions from a goodwill, time, and tactical standpoint. Furthermore, a history of periodic or annual valuations may provide the owners and business broker with a foundation for negotiating even more favorable deal terms.