Whether you’re selling your massage business, buying out a partner, or obtaining a small business loan, it’s necessary to know the value of your business. Even if you’re not considering any of these options right now, it may still be in your best interest to know what your business is worth. Let’s take a look at what a business valuation is, why you might need one, and what factors—economically and otherwise—affect your business’s value.

What Is a Business Valuation?

A business valuation is a report compiled by professionally trained appraisers, accountants, and/or business brokers that estimates the economic value of a business or a person’s interest in a business. According to Andrew Rogerson, author of Successfully Sell Your Business: Expert Advice from a Business Broker, there are essentially three types of business valuations: broker’s opinion of value, standard appraisal, and a business appraisal report. Though you may not need all of them to sell or place a value on your massage therapy business, it is helpful to have an understanding of each.

The broker’s opinion of value (BOV) can be created by anyone, as long as they disclose their training and experience. It’s important that the report shows the qualifications of the person that put the appraisal together and the methods they used. A BOV can be created with limited access to your financial information and a set of comparable sales. This type of business valuation can be used to arrive at a selling price (or value) for a business, and is generally used by business brokers. It does not conform to the Uniform Standards of Professional Appraisal Practice (USPAP), though, and cannot be used in a court of law for divorce proceedings, to settle with the Internal Revenue Service (IRS), or buy out a partner in your business. The cost of this type of valuation, according to Rogerson, is between $500 and $1,000.

The second type of business valuation is a standard appraisal, which uses a limited set of valuation techniques, but is USPAP-compliant. This valuation essentially details how the appraiser reached the value, but does not include information such as the condition of the national economy, the history of the business, the outlook of the industry, and in-depth financial analysis. The cost of this type of valuation ranges from $2,500 to $4,000 and may be too detailed for a massage therapist wanting to sell or value a practice.

Rogerson says the third type of business valuation is a business appraisal report. This document is also USPAP-compliant, and covers in-depth financial analysis, ratios of the business, as well as a presentation of the economy, its impact on the business, and full details of the company. This business valuation ranges from $5,000 to $12,000, though costs can go as high as $30,000 for very complex companies. This report is probably too in-depth for therapists who want to sell or value a practice.

For standard appraisals or business appraisal reports to meet USPAP standards, they must be approved by someone holding the correct certifications. “There are different organizations that provide the initial and then ongoing training, testing, and then certification of their appraisers so the reports meet USPAP standards,” Rogerson says. “These include the American Society of Appraisers, the Institute of Business Appraisers, and the National Association of Certified Valuation Analysts.”

Do I Need a Business Valuation?

“The valuation game begins the day you start a business,” says Neil Ducoff, founder of Strategies, a salon and spa business education resource. According to Ducoff, too many owners wait until they want to get out of their business to pay attention to the value of it, which is a mistake. Bryan Cook, an appraiser in Tennessee, concurs. “If a business owner wants to get the very best price for their business, they should employ a business broker to give them a valuation at least two years before they want to sell,” he says. “If there are major defects in the business operations or accounting practices, they can be repaired in that time.”

Cook says an attorney and accountant should also be consulted to minimize tax effects or any future liability from the sale of the business, and a good financial planner is helpful in transitioning the gains from sale into investments appropriate for the risk tolerance and life stage of the seller.

What Am I Selling?

Your massage and bodywork practice is a service-oriented business, so you’d think that you’d be selling or placing a value on your customer list, right? Well, essentially that’s true, but there are other considerations that may make your business worth more money.

“First, there may be assets in place such as equipment, furniture, real estate (if the business owns the facility), and cash on hand,” says Robert J. Allen, a financial analyst in Tyler, Texas. “In addition, there may be some other specifically identifiable assets such as a trade name, signage, employees, and staff in place.”

Michael Soon Lee, a California residential specialist, agrees, but adds that the quality of your customer list is also very crucial. “Details are important because the new owner will want to quickly build a relationship with them, and there’s an art to building a good list.” (See Create a Client List, on page 70.)

Other considerations that add value to your business, according to Lee, include:

• Goodwill, the dollar value placed on your reputation, can add a lot of value to your business.

• A top location is worth money, unless there are a lot of similar vacancies nearby.

• Below-market rent adds value as opposed to opening a brand new location (at market rent) and having to make tenant improvements.

• A finished space with massage tables, proper lighting, sound system, etc., is worth more.

• Seller financing adds value to the business because it increases the pool of available buyers.

Another huge factor is the amount of direct customer contact the owner has. Certified professional accountant (CPA) Christopher Farrell says, “If an owner does most of the face-to-face interaction with clients, there could be substantial doubt as to the number of clients that would move over to the new owner. Just because they like the current owner does not mean that they will like the new one. But, if employees do most of the hands-on work, then the name and reputation of the business play a larger factor. The ownership change [might] be invisible to the clients.”

Business consultant Brent Larlee says it’s important to consider the number of competing businesses in the area. “If you are the only massage therapy [business] in a town or region, or if you are the largest, this information may add value to your business.”

He says another consideration involves the contracts or agreements the business has in place. For example, if there are some occupational therapy agreements that would survive (if the business was sold), then these will carry value.

Millie Haynam, of Ohio-based Natural Beauty Salon & Spa, says trade secrets or body treatment formulas involved when selling your business may also add value. Plus, she says, you may have a considerable amount of outstanding gift certificates, and you’ll need to factor those into the sale price as well.

How Do I Place a Value on My Business?

There are several approaches used to value a business, and experts agree that using more than one approach when preparing a business valuation report is the best indicator of true market value. Bryan Kirchwehm, of Pacific Valuation Consultants in Los Angeles, says there are three generally accepted approaches to valuation: the market approach, the income approach, and the cost approach. “The income approach is the most commonly accepted,” he says, “as it places a value on the future cash flows expected to be received from an investor contemplating a purchase of that business.”

David E. Coffman, founder of a Pennsylvania business valuation company, agrees, but says that an established, profitable massage therapy business should be valued using both market and income approaches. “Market methods look at sales of similar businesses, and income methods look at cash flow,” he says. “Both approaches have pros and cons, so both should be considered.”

Lee says that from a realtor’s standpoint, return on investment (ROI) is the most common method used by brokers when establishing what your business may be worth to a buyer. Your business value is affected by how much money a buyer will need to get the business going, according to Lee, including franchise fees and tenant improvements. Once a buyer knows how much must be put into the business, he says, he or she can then compare the return that of other possible investments.

Mike Handelsman, general manager of www.bizbuysell.com, suggests that an owner of a massage therapy business might start the valuation process by using an online business valuation tool, which provides an accurate value of a business based on comparable businesses, cash flow, and location.

“Most businesses are valued by industry comparables,” Handelsman says. “For example, if there is a history of transactions in the industry, and one can determine the average multiple of revenue and cash flow that [similar] businesses in the industry sell for, then that is a strong basis from which to value a business. The challenge is usually finding a set of comparables for the industry.”

Farrell says “earnings can [and should] be adjusted for taxes, interest, and depreciation in order to get a more accurate picture of the amount of cash that the business generates. The term EBITDA is often used, and means earnings before interest, taxes, depreciation, and amortization.” He says if you are valuing based on earnings or revenue, you have to come up with a capitalization factor, which would reflect the risk associated with purchasing this business. “The riskier the business, the higher the factor,” Farrell says.

Another factor when valuing your business is determining your motive for selling, Ducoff says. “The purpose of obtaining a business valuation is to determine whether your practice or spa is saleable,” he says. “Then you have a very important question to ask yourself before even getting started: Why do you want to sell? Believe it or not, your reason may raise red flags with prospective buyers. Being ready to retire or move on to other things will likely not cause a second thought, but if the business is in trouble, you’d better try to fix the problems before putting it on the block. For what it’s worth, if you fix the problems, you may decide not to sell.”

Ultimately, the final sale price of your massage and bodywork business will depend on how badly the buyer wants to buy, and how badly you want to sell. A valuation expert can help you meet in the middle, but the buyer and seller must both be willing and excited about the transaction. That’s the bottom line.

What Documents Do I Need?

In addition to a formal business appraisal, if available, Lee says there are several important documents commonly used for business valuations. Here is a short list:

Adjusted Profit and Loss Statement

“You must adjust the P&L [profit and loss statement] because many small business owners will deduct legitimate perks, such as the use of their vehicle, pay themselves higher-than-average salaries, etc.,” Lee says. “You’ll need to ‘add back’ these discretionary expenses so that a buyer can see what it will truly cost him or her to run your business. Depending on the buyer, you may need to have your financials audited as well.”

Accounts Receivable and Allowance for Bad Debts

“These two accounts must be examined together,” Lee says. “The buyer should make certain that the net receivables on the balance sheet are really collectible by examining the percentage of receivables and bad debts for the past three years.”

Property, Plant, Equipment

“A professional appraisal of buildings and equipment, if any, is good,” Lee says. “However, don’t forget that the value of used tangible items is usually very low.”

Depreciation Schedules

These will show tangible personal and real property. Some experts say federal tax returns are needed as well, as they show the detail of income sources and expenses, and can be used by business brokers to uncover hidden assets or cash streams.

Chad J. Simmons, author of Business Valuation Bluebook, How Successful Entrepreneurs Price, Buy, Sell and Trade Businesses, says other documents used to substantiate business performance include a record of customers’ visits per period and a schedule of rates. “But they must add up to one important point—that there is enough money in the business to pay off the debt, pay the operating owner, and offer a significant cushion of discretionary cash flow in case things don’t work out as well as expected,” he says.

Like most small business owners, massage therapists should keep solid financials on their income, expenses, and profit for the business, Handelsman says. “This will provide them with the information they need to secure a loan, sell the business, and hopefully manage the business successfully. There are many small business software programs, like QuickBooks, that can help owners track this information.”

Usually three to five years of financials are needed for a business valuation, but “There are no set rules to the amount of time a business has to be in operation to get a loan or sell,” Larlee says. “If the business is relatively new, the buyer may use some assessments, like whether the owner has had previous businesses in the same industry and whether these businesses were successful.”

Larlee says sometimes valuation is driven by past performance and other times it can be driven by future opportunities. “In the massage therapy industry, it will probably be more driven by past performance, so the lender or buyer may want to see at least 12 months of historic performance, and more likely 36-plus months.”

When a business does not have a long history, the lender or buyer will look at the owners and managers, Larlee says. “From a lending perspective, [the bank] may require a new business owner to sign personal guarantees for any loans—meaning the owner’s personal savings and assets are collateral for the loan. From a buyer’s perspective, they [want] to see if the owner has a track record of successful businesses and may factor in whether the owner will continue to be active in the daily operations of the business.”

Simmons says the number of financials you need to provide for this process is enough to get the job done. “Many will say three to five years of records and this is a good estimate to use,” he says. “But in providing these documents, the borrower is not simply trying to show the business is ‘for real.’ What the lender really wants to see, in addition to the reality of the business performance, is the trend of business performance, because the trend shows whether the business is growing or fading. And that is more of a basis for making a loan than many realize. So, offer the lender as many years of records as you need to show the trend you want to illustrate.”

assemble the Experts

So who will you need to help you get through this process? “The business owner needs to think of assembling a team around themselves to perform certain mission-critical functions,” Simmons says. This will include a broker, a banker, a lawyer, etc., and all for different reasons. “A banker is helpful to qualify the business sale proposition before it is made available so you know it can be financed to the right buyer at the asking price. You need a broker to create inquiries for the business and handle negotiations with professional objectivity. A lawyer is needed to make sure you can get a contract written that effectively communicates your interests to a buyer.”

Ducoff says the importance of a business valuation professional is to provide unbiased opinions of a business’ value. “An expert appraisal can save time, money, and stress by ensuring your goals are realistic from the outset. Additionally, the objectivity of a third-party valuation will be crucial if the results are examined by others.”

The main reason to use a business broker, Ducoff says, is the protection of your bottom line. “Fundamentally, they are similar to residential real estate brokers and using one will result in more potential buyers, which will generate more competition in bidding. A business broker will also know how to identify the right buyer—one who truly understands the value of your business. [This way] you will leave the transaction confident that you got the best price and terms possible.”

Final Words of Wisdom

As mentioned, a sole practice is dependant of the massage therapist and that can be problematic for the sale. “If the owner does things to prove the business can run without them, the value will be better,” Simmons says. “This would be a good strategy for any business owner who thinks they might sell in a few years to put in place now.”

Selling a business is a big decision. The cost of good advice will be well worth it and can have a profound effect on whether or not the business will be successful.

Being flexible, however, may bring you more money, Farrell says. “Many times with service businesses, sales contracts are flexible. The selling price is paid over time and is dependent on the number of clients that remain and the amount of revenue generated by the new owners.”

Contracts will probably contain a covenant not to compete. “A covenant not to compete bars the seller from opening a competing business for a certain amount of time in a particular geographic area. This is standard and serves to protect the buyer,” Farrell says.

Whether or not you’re considering selling your MT business, buying out a partner, or obtaining a small business loan, it may still be in your best interest to know its value. Having this knowledge today means you’ll most likely reap a much better return tomorrow.

 Lisa Bakewell is a full-time freelance writer in the Chicagoland area. Her areas of expertise include business how-tos, health/exercise, and profile pieces. She believes everyone has a story to tell and something unique to teach us. Contact her at www.writerlisabakewell.com.