Mergers and acquisitions can be stressful for entrepreneurs who have invested blood, sweat and tears in their businesses — or second-generation owners who are selling their parents’ legacies. Setting the asking price and understanding the deal terms, including complex tax matters, can be overwhelming. Fortunately, a business valuation professional has the financial knowledge and real-world experience to help maximize the selling price and minimize the guesswork. Preparing for sale Valuators understand the relationship between risk and return as well as factors that affect value. So they’re equipped to assist in making companies more attractive acquisition candidates. Before a business goes on the market, a valuation pro can help address the following critical items: Financial statements. Audited financial statements offer prospective buyers greater assurance than reviews, compilations or internal...

The starting point for a business valuation is generally the subject company’s financial statements. Here’s an overview of how historical financial statements can serve as the basis for a valuation professional’s conclusion under the cost, income and market approaches. Cost (or asset-based) approach Because the balance sheet identifies a company’s assets and liabilities, it can be a reliable source of financial information, especially for companies that rely heavily on tangible assets (such as manufacturers and real estate holding companies). Under U.S. Generally Accepted Accounting Principles (GAAP), assets are recorded at the lower of cost or market value. So, adjustments may be needed to align an item’s book value with its fair market value. For example, receivables may need to be adjusted for bad debts. Inventory may include obsolete...