A business valuation is a process of determining the economic value of a business or a part of it. An economic value of the business is which includes the financial and non-financial performance metrics of a company. Determining the business value of a private and unquoted company is equally daunting as for large listed companies.
There are several motives for determining the economic value of a business. A business valuation may be required if you:
- Want to sell your business or part of it e.g. a branch.
- Are applying for substantial debt financing with a bank.
- Want to offer equity/shares to your employees.
- Are splitting the ownership of the business or adding new investors as owner partners.
- Have tax management purposes.
- Need understanding business fair market value.
- Are using business valuation as a proxy to buy a similar business.
In addition, the most common motive for business valuations is selling or buying a company. Small and medium-sized businesses often find it difficult to evaluate the true economic value of their businesses. Moreover, a professional business broker and CPA with Accredited designations can help you through the process.
Preparing for Business Valuation
Before you hire a professional business valuation appraiser, there are a few steps you should take. These steps will help you evaluate the true economic value of your business.
- Gather financial records and organize them. Keep the financial statements and audited records of your business at your desk.
- Gather tax returns and bank statements. Ensure to match the tax returns with the latest tax liabilities in order.
- Organize the financial records, they will form the basis of your business valuations.
- Gather records for your non-financials for your business.
- Organize key statements on your assets, including the intangibles.
- Assess your most important company asset, i.e. Human Capital.
- Include your business’s competitive edge in the valuation process. Take your certifications, patents, or other valuables with you.
Your business valuation appraiser may use one of the several valuation methods. You already have the starting figures through the financial statements. Make sure to find the most suitable business valuation method for your business.
There are several business valuation methods, we can categorize these methods under three broader categories.
This is the most commonly used business valuation method. It includes the balance sheet assets of a business and subtracts the business liabilities. The asset-based valuation takes into account the book values of the company assets. However, for valuation purposes, a business should include the market values of assets and liabilities.
There are two ways for asset-based valuations. A going concern takes into consideration the current assets and liabilities values. A Liquidity concern takes the business assets’ net proceeds as if the business goes into a liquidation.
Business valuation can also be done through the estimation of the earnings of a business. Furthermore, potential buyers can be interested in determining the historic earnings as well as the future earnings prospects of a business.
The Market Value Method
In short, the market value methods make a comparison of recently sold business in a similar industry. For private businesses finding the proxy sale with the right size, market, and industry can be challenging.
Business valuation appraiser can use different methods, there is no one-fits-all formula. In addition, a business with more tangible and current assets would prefer an asset-based valuation. On the other hand, a small business in the services industry with intangible assets would avoid an asset-based method.
Furthermore, the best way forward can be to utilize the combination of different methods. It is always preferable to include both financial and non-financial metrics into consideration. In other words, the choice of method will also depend on the purpose of the valuation.
Get the Professional Help
Now that you’ve learned more, it’s time to talk to a professional. Likewise, a professional evaluator will help you identify the true economic value of your business. Furthermore, working with a professional can help you improve on the weaknesses and build the strengths to increase the valuation.
Improving the business valuation is desirable for any business, however, a professional can best advise on the appropriate steps. Contact AW Business Brokers at (508) 492-8728 or request a call online.