Understanding the Intricacies of Valuation of a Company
Every business owner, at one time or another, wonders how much their current business is worth. This is understandable because when you’ve exerted so much effort and time in growing your company, it would be good to be reassured that your effort has not gone to waste and that your business has considerably grown in value over the years. To measure the current worth of your business, you have to take the time to understand the processes and concepts involved. Moreover, you should also take this as the best time to appreciate the value of professionals that render business valuation services; they can be of valuable help in assessing the proper valuation of a company.
The proper ways to value a company is quite complicated and challenging. It combines art and science to end up with a valuation that is accurate and defensible. However, you must remember that although the value computed is fixed as an exact number its exact value is proven in an open market at the time the business is sold. Ultimately value is defined with qualified and willing buyers, and all the relevant market valuation factors come into play.
In general, the valuation process involves a collection of relevant information through the following steps:
- Conduct a careful analysis of your company including its current assets, history, market and other relevant business information. Your valuation will depend on the quality of information available on the valuation date.
- Secure accurate and complete financial reports; these documents are crucial for the use in determining the current value of your business.
Professionals who provide valuation of a company services usually employ several valuation methods. The most basic ones are the asset-based valuation, market-based valuation, earnings-based valuation, and the cash flow-based valuation.
This type of valuation is used to establish the liquidation value of an existing business, taking into consideration the current liquidation market prices of all the company’s saleable assets and its outstanding liabilities, if any. The downside of this method of valuation is that it is often inaccurate because it is hard to assign values to certain intangible assets like trademarks and goodwill.
Market-based valuation makes use of other businesses of similar nature as the basis for valuation. By knowing the value of similar businesses in the industry, you can come up with a fair estimate to value your business.
Earnings-based is somehow related to the Earning-based valuation. It is computed taking into consideration the weighted average of normalized earnings before taxes and dividing it over the capitalization rate. Normalized earnings are calculated by getting the weighted average of earnings over a particular period of time. Capitalization rate, on the other hand, is expressed as investor’s ROI; it is seen as the statement of the risks involved in your business compared with other available investments.
Cash Flow based Valuation
This method of valuation is similar, in some respects, to the earnings-based method. It is based on the expected cash that the business can generate in the future, and computed by discounting the cash flow to its net present value using a certain discount rate. Not a lot of people use this type of valuation because of the difficulty involved in determining the accurate cash flow in the future. Professionals that provide business valuation services could advise you to approximate these figures using historical data, but still, selecting the discount rate to use in the computation poses another challenge. Many would claim that it’s more difficult than choosing the applicable Cap Rate.
In all of these methods and exercises, the presence and guidance of a professional who’s well-versed in providing business valuation services is very important. The valuation of a certain business is influenced by other factors other than those given in the valuation formulas. There are certain conditions that can either increase or decrease the approximate computed value like the overall health of the business, competition, future forecasts, state of the industry, state of the economy, legal environment, and business assets including goodwill and your market image.
How To Find the Best Service for a Valuation of a Company
Business exit and succession planning is in the forefront of many current business discussions. Most prudent business owners engage the help and assistance of professional Business Exit and Succession Planning experts to help them strategically plan for an eventual business exit by creating effective exit and succession planning strategies. Part of business exit planning includes the creation of a valuation of the business. A solid business valuation helps business owners understand the objective and subjective valuation drivers. Having this knowledge helps businesses owner’s act on preserving and growing the valuation of their business. Sometimes business owners may encounter unforeseen and immediate situation forcing them to make immediate decision to sell their business. If in the past their planning and preparation for unforeseen events included a business valuation with regular updates to the master valuation they are more likely to receive a premium price for their business as well as a faster sale. Having a solid and defensible business valuation will always prove to be very helpful in negotiations for the best price and terms.
A company valuation is basically a expert analysis and review of the company as well as external factors that impact the valuation of a given business in given market environment. Basically through much analysis and review the valuation expert determines an asking price (business valuation) that can hold up to the scrutiny of business buyers and their advisors. A business valuation can be usually produced in three different ways; summary valuation, limited scope valuation and comprehensive valuation. As to which type of valuation is best depends on the purpose of the valuation as well as how the valuation will be challenged and how strongly the valuation has to be defended. One key factor to remember is to utilize a very reputable expert business valuation professional or firm that not only has business valuation expedites and knowledge but also is involved in mergers & acquisitions (business sales & acquisitions). A business valuation professional or firm with these credentials and experience has a much greater ability to create and defend a business valuation much better than someone with only business valuation theory and procedures and processes. Having a thorough valuation can also help you in your negotiations for the final selling price.
A firm that performs three key functions; Business Exit Planning, Business Valuation services and Mergers & Acquisitions (Business Sale & Acquisition) we at American Fortune are very equipped to produce the most reliable, defensible and accurate valuations in the market. The Business Valuation division of American Fortune is a national entity, delivering credible valuation conclusions by applying the most advanced and appropriate valuation techniques. Every business is unique and therefore each business valuation is also unique. Research is the foundation of valuing a business, which is why American Fortune Business Valuation Services has developed its own databases; it also utilizes external databases for economic, market, industry and other related research. American Fortune Business Valuation Services analysts spend numerous hours researching historical transactions, reviewing court cases and conducting detailed financial analysis for every valuation assignment to assure that we provide the most accurate and defensible valuation possible.
Our featured valuation is the called The Comprehensive Business Valuation. This valuation is the most comprehensive and detailed and it is developed in accordance with the Uniform Standards of Appraisal Practice. The Comprehensive Business Valuation is best suited in cases where the party or parities want to have included all of the key valuation approaches and when a party or parties require much detail in the valuation report. The basis of the valuation is current and historical earnings, future performance and potential playing a limited role in the valuation conclusion. The comprehensive business valuation incorporates broad and complex business reviews, financial reviews and analysis. This valuation is very defensible. It utilizes seven to ten valuation methodologies. The selection of guideline companies comes from both the private and public markets, which makes the valuation conclusion more accurate. The report is 40-50 pages long.
To learn more about business exit planning click on the following: fortunebta.com/exit-planning/
There Is No Reason Why Valuation of a Company Is So Expensive. Business Valuations By American Fortune Are Not Only Accurate And Defensible They Are Also Low Cost. To learn more about business valuation methodology click on the following: fortunebta.com/business-valuations/
American Fortune has provided clients with valuation of a company services in the following areas of the USA: Columbus Ohio, Atlanta Georgia, Lexington Kentucky, Bowling Green Kentucky, Nashville Tennessee, Memphis Tennessee, Cincinnati Ohio, Dayton Ohio, Toledo Ohio, Los Angeles, Cleveland Ohio, Pittsburgh Pennsylvania, Baltimore, Maryland, Indianapolis Indiana, Chicago Illinois, Detroit Michigan, Flint Michigan, Tampa Florida, St. Louis Missouri, Kansas City Kansas, Des Moines Iowa, Minneapolis Minnesota, Louisville Kentucky, Oklahoma City, Oklahoma, Dallas Texas, Fort Worth Texas, Denver Colorado, San Francisco California, Salt Lake City Utah, Phoenix Arizona, Lexington Kentucky, Los Angeles California, San Diego California.