Value is more than numbers, as any business owner can tell you, and the process for determining the worth of that business is an act that is equal parts skill and art.
Assessing the value of a business or business unit, known as a business valuation, is a tool used to determine the sale value of a business, to establish partnerships, or for tax purposes.
Business valuation may seem straightforward, but it often takes a qualified professional to analyze the company’s financial statements and consider comparable transactions, industry ratios, and other quantitative and qualitative information.
It is a tool that is necessary to obtain or receive the fair value of a business. Professionals often take this skill (and art) to task using tried-and-true methods to create an accurate picture of the value a business holds.
Why is Valuation Important?
Valuations are performed for many reasons, including but certainly not limited to selling or acquiring a business. Valuations are important any time a business’s assets need to be determined for legal filings (such as in cases of death, disability, or divorce).
Other reasons may include:
- To raise strategic capital or obtain a Small Business Association (SBA) loan
- Implementing an Employee Stock Ownership Plan (ESOP)
- To reconcile perceived opinions on value
Coupled with a marketability analysis, a valuation can help a business owner determine relative value in the marketplace and is vital for all these reasons.
Methods Used to Determine Value
Several methods of valuing a business exist.
Here are a handful that are often used to determine valuation:
- Market Capitalization: A simple method that multiplies the company’s share price by its total number of shares outstanding
- Times Revenue Method: Uses a stream of revenues over a fixed period of time and assesses based on industry and economic environment
- Earnings Multiplier: Adjusts future profits against cash flow that could be invested at the current interest rate over the same period of time
- Discounted Cash Flow (DCF): Same as Earnings Multiplier method, but takes inflation into consideration
- Book Value: What is shown on the balance sheet derived by subtracting total liabilities from total assets
This is just a snapshot of the many methods used to determine value, some of which are important when outside factors, such as economic environment and inflation, need to be considered.
This is where the art comes in, and hiring a professional who can determine the best method often paints the clearest picture.
How a Professional Broker Can Help
Most companies will gain a higher valuation when they work with a broker who can bring strategic insights to the process.
A broker is particularly valuable in the later stages of a sale, which include negotiations, due diligence, and finalizing the deal. But consider hiring a professional in any instance in which a qualified professional is needed for an accurate analysis of a company’s value.
With the many methods available, and many reasons to seek business valuation, professionals are a key resource in the quest to determining the worth of what a business owner worked so hard to create.