A business owner may need to determine the value of their company for several reasons. They may need financing or plan to merge with another organization.
Meanwhile, investors use valuation to inform decisions about providing capital or purchasing ownership stakes. Various formal and informal methods exist for valuing an enterprise. While valuation may seem academic, it directly impacts practical financial and strategic decisions.
Working With a Business Broker
Business brokers have extensive expertise in business valuations for a wide range of industries and company sizes. They use recognized valuation methods and tools that adhere to industry standards, providing transparency and credibility to the process.
This allows them to account for both quantitative factors like assets, revenue, and profitability as well as qualitative attributes including market position, growth potential, and workforce talent.
In addition to determining an objective company value, a broker serves as an advisor to help you understand valuation methodologies so you can make informed decisions. They can factor in the unique aspects of your business, customers, suppliers, and commercial relationships that impact value.
Brokers have perspectives across geographical markets, allowing them to account for regional economic environments and industry trends.
Unlike relying on DIY online valuations, they can back up their valuation with comprehensive documentation, analysis, and expertise. Working with a business broker like those at cgkbusinesssales.com ensures the company is valued accurately.
Reasons for Valuing a Business
Several situations call for properly assessing a business’s market value, including:
Tax and Accounting Purposes
Businesses must report asset values regularly for ongoing tax and accounting obligations. Owners need accurate fixed asset appraisals for calculating depreciation.
During ownership transfers, valuation provides support for establishing a purchase price from both the buyer’s and seller’s tax perspectives. Estate planning also relies on business valuation for gifting company shares or planning for inheritance tax.
Securing Investment or Financing
Seeking outside investment or financing requires demonstrating the strength of the enterprise, often involving a professional valuation. Investors want to quantify potential returns relative to the risk of providing capital.
Lenders need to appraise assets when underwriting loans, particularly for asset-based financing. Even crowd-funding campaigns perform better with some valuation evidence.
Mergers and Acquisitions
During mergers, acquisitions, or ownership restructuring, all parties must agree on the business value. Buyers don’t want to overpay while sellers seek a maximum sale price. Independent valuation provides an objective basis for negotiating the transaction.
When selling just a portion of the company, shareholders require a recent valuation to determine percentages and control premiums.
Shareholder Disputes and Litigation
Disagreements sometimes arise between owners concerning company value and fair distribution of equity or assets. An objective valuation can resolve disputes or prevent litigation.
Valuation also plays a crucial role in shareholder lawsuits over company mismanagement and minority oppression claims. Courts depend on expert valuation testimony in these cases when determining restitution or assessing damages.   Methods for Valuing a Business
Various methodologies exist for valuing an entire enterprise or ownership interests. Common approaches include:
Asset-Based Valuation
This method tallies up all business assets net of liabilities at fair market value. Hard assets like real estate, inventory, and equipment are simpler to value than intangibles like intellectual property and goodwill. Asset-based valuation establishes a floor for company worth.
Market-Based Valuation
By analyzing recent transactions of comparable companies, valuators determine pricing multiples such as ratios of price-to-earnings or enterprise value-to-EBITDA.
Applying multiples from guideline public firms or previous sales of similar private businesses provides valuation ranges. Adjusting for relative size, risk, and growth prospects affords the most accurate assessments.
Income-Based Valuation
Future company profits drive most valuations, discounted to today’s dollars. Valuators build financial models projecting revenue, expenses, taxes, investments, and cash flows.
Applying an appropriate discount rate determines the net present value. Variations like discounted cash flow analysis or excess earnings methods apply standard modeling techniques for specific situations.
Rules of Thumb
Informal rules of thumb provide quick valuation estimates for small businesses, professional practices, online platforms, and other common company types. Common rules of thumb include multiples of SDE (seller’s discretionary earnings) or website traffic.
While easy to calculate, rules of thumb valuations do not account for specific risk factors, so treat these estimates as ballpark figures.
Hybrid Valuation Methods
Valuators commonly apply a blend of income, market, asset, and rule-of-thumb approaches tailored to the particular business and purpose. The various methodologies provide cross-checks, and combinations minimize the limitations of individual techniques.
Weighted averaging affords flexibility for specific valuation factors while still providing quantitative support.
When to Conduct a Business Valuation
Owners should value their company every 12 to 36 months as a matter of good governance. Even if no transactions are imminent, regular valuation identifies risks, charts progress, and grounds expectations.
Annual valuations also prepare the business for any opportunities or contingencies. More specific timing guidelines include:Â Â Â Leading Up to Financing/Investment Event
Valuate six months before anticipated funding events. This affords time for additional analysis if the initial valuation disappoints. It also avoids desperation financing if the process reveals weaknesses to address.   Around the Time of Ownership Changes
When selling or transferring ownership stakes, an independent valuation no more than three months old allows negotiations based on still-current information. Waiting too long risks outdated projections or unaccounted changes.
Following Business Milestones
After major milestones like new product launches, customer wins, or expansion into new markets, value the business to quantify success. This demonstrates progress to stakeholders and provides incentive metrics for owners and management.   During Disputes or Litigation
You need an objective, independent assessment of the current fair market value of the business during disputes or litigation. This valuation can be important for several reasons.
During a shareholder dispute, it determines the value of ownership interests and guides buyout negotiations. In divorce cases, it ensures an equitable division of business assets. It also sets values for estate planning purposes in case of death or incapacity.
Business valuation requires applying professional judgment and available informational inputs tailored to the specific purpose. With a range of methodological options, valuators must select the optimal approaches given company particulars and intended uses. Because so many weighty financial decisions rely on accurate assessments of value, owners should make valuation an ongoing priority.
