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Valuation of a Company
Company valuation has grown to be both a science and an art. To arrive at a defensible valuation of a company, an expert on valuations needs to follow the standards and norms that have been developed by experts in the business valuations profession.
Many well-intentioned business valuation professionals fail to produce accurate and defensible business valuations primarily because they do not possess the knowledge of the “art” of business valuations. The art portion of a business valuation assessment comes from the forces of the marketplace including mergers & acquisitions experience and the constant changing dynamic of the expected rate of returns for given risks.
There are several approved business valuation methods. Business valuation experts typically utilize several methods that best fit the criteria of the business and industry of the business being valued. To arrive with a value, the business valuation expert will normally use the average of all the methods utilized as an indication of the final value. The following are the most common:
- Capitalization of Earnings
- Discounted Future Earnings
- Adjusted Book Value
- Comparable Price, Excess Earnings Capacity
The valuation expert will carefully utilize the appropriate methods and also utilize the applicable weights to each of the methods to arrive with an accurate and defensible valuation of a business.
In evaluating a business opportunity, business buyers and investors use three key factors in business appraisal reports. Buyers (Investors) of businesses place an extensive weight on the business’s ability to generate sufficient earnings, since these earnings allow them to 1) pay themselves a suitable salary, 2) be able to service the debt incurred in the acquisition of the business, and 3) receive an appropriate return on their investment.
Additionally, buyers (investors) look at value drivers which are characteristics that reduce the risk of owning the business or increase the probability the business will grow in the future. If these characteristics are present in a business, a buyer will pay a premium price. The most common business value drivers include Management Team, Systems & Procedures, Customers & Suppliers, Facilities & Equipment, Financial Discipline, and Growth Strategy.
Another consideration of a company valuation is the relationship between size and risk. Mergers and Acquisitions professionals refer to a “small company discount,” which often applies because of the perception that a very small company is riskier than larger businesses. It is generally understood that larger businesses are more substantial and stable organizations because they have found a way to grow beyond the efforts of the owners (s) and are therefore less reliant on the owner(s). Because of this perception, the size of a business affects the valuation of a business.
One of the biggest factors in the valuation of a company is the extent to which an acquirer (buyer) can see where the company’s sales will come from in the future. For an entity that must bring new business each month, a company valuation will be lower than if the company had repeat sales and could pinpoint the source of future revenues.
A recurring revenue model acts as a powerful pair of binoculars to help see a month or even years into the future, so creating a steady stream of revenues is the best way to increase the valuation of a company. There are various forms of recurring revenue. The more assured the future revenue is, the higher the business valuation of a business.
Why are Company Valuations Needed?
Business Appraisal Reports are an important tool because they help to validate and benchmark the true worth of a company. Once the valuation of a business is known, the business owner can concentrate their resources on maintaining and increasing its value.
Business Appraisal Reports prepared by an expert set in place a credible value benchmark. Professional business valuation services prepare a fully documented detailed written report and provide a realistic, credible, and defensible valuation of a business.
Our practical knowledge of business valuations comes from our daily involvement with Business Sales and Merger & Acquisition services. Our in-depth knowledge of Mergers & Acquisitions and Valuation Methods result in business valuations that are more accurate, credible and defensible than a business valuation prepared by companies that do not possess market experience and business sale expertise.
When procuring a company valuation report, make sure the valuation of a company is built on a firm foundation that can withstand challenges. Finding the right company to value a business can make all the difference in obtaining an accurate and credible business valuation. American Fortune Business Valuation’s broad and unique expertise and experience results in the creation of very accurate, defensible and business valuation reports for the following purposes: wealth preservation, increasing wealth, sale of a business, business acquisitions, divorce, business loans, estate planning, buy out agreements or business exit & succession planning. Since the firm also performs Mergers & Acquisitions Services and Business Exit Planning they possess expertise and experience that most business valuation firms do not possess. Because American Fortune Business Valuation firm posses the additional expertise and experience it allows them to create very Accurate, Defensible and Low-Cost business valuation reports.
How are we able to accurately perform a valuation of a business in a Summary Format? Our ability to perform such appraisals comes from our expertise in valuations and expertise/experience in merger & acquisition services. This combined expertise and know-how affords us the capability to produce accurate and affordable valuations of a business.
Business Appraisals are valuable in a sale or buyout of a business, estate planning, exit planning, tax planning, buy-out agreements, or divorce. However, the most important reason for valuation of a business is the knowledge it yields. Once the owner and/or their advisors know the market valuation of a company, they will also learn how objective and subjective value drivers decrease or increase the value of a business. They are able to use this knowledge in successfully growing the value of their businesses.
To view a sample report of the Business Value Estimate, Calculation of Value and Comprehensive Valuation please scroll down.
Business Value Estimate
This report is specifically designed for business owners to provide a fast and easy estimate of value for a business. The report is based on a combination of 8 valuation methodologies, a comparative data that help verify the estimate of value. Based on these methods and data an approximate value of a business is configured via a customized 38 page report. This report is not a professional valuation of a business and is not suitable for use in estate planning, divorce proceedings, buy-sell agreements, ESOP’s, IRS issues, or legal proceedings. Price: $1,250. To view a sample Business Value Estimate – Request Sample
Calculation of Value
This Calculation of Value report takes basic value drivers to produce a semi-formal valuation. It utilizes four to five valuation methodologies. This type of valuation yields a moderately defensible valuation report. The report is 30-35 pages. Price: $2,300. To view a sample Calculation of Value – Request Sample
Comprehensive Business Valuation
A comprehensive business valuation that incorporates broad and complex business reviews, financial reviews and analysis. This valuation is very defensible. It utilizes seven to ten valuation methodologies. This valuation is very accurate and very defensible. The report is 40-50 pages. Price: $4,000. To view a sample formal valuation – Request Sample
When Is a Valuation of a Company Needed?
Which Company Valuation is Right for You?
Choosing the right valuations report depends on three factors: 1) the need and requirement for details, 2) how strongly will the valuation have to be defended, 3) the purpose of the valuation of a company.
Because we also provide Mergers & Acquisitions services we possess greater business valuation knowledge and experience which makes business appraisal work easier for us and therefore we are able to offer prices on business valuations at 30-40% less than that of our competitors.
American Fortune company valuations follows the requirements as defined by the American Institute of Certified Public Accountants on Standards for Appraisal Services No. 1 (SSVS No. 1) and performed in accordance with the Uniform Standards of Professional Appraisal Practice (USPAP) as promoted by the Appraisal Foundation and the International Valuation Standards (IVS).
For more information on valuation of a company contact American Fortune Business Valuation Services at 502-244-0480 or email@example.com
There are several Professional Valuation Services and Associations and the top two organizations are The Uniform Standards of Professional Appraisal Practice and The National Association of Certified Valuation Analysts.
Uniform Standards of Professional Appraisal Practice
The Uniform Standards of Professional Appraisal Practice is regarded as an “umbrella” of professional business valuations services standards that is often appropriate for any appraisal, whether the appraisal is of real estate, personal property, a business, a business interest, or an intangible asset. Uniform Standards of Professional Appraisal Practice is promoted by the Appraisal Standards Board of The Appraisal Foundation. The organization was established to foster professionalism in appraising services through the establishment and promotion of appraisal standards and appraiser qualifications. The purpose and mission of the Appraisal Standards Board of The Appraisal Foundation is to promote the generally accepted services standards of the appraisal (business valuations) profession.” These standards generally accepted in both judicial decisions and in the professional literature.
National Association of Certified Valuations Analysts
The National Association of Certified Valuation Analysts was founded in 1991; it focuses on valuations of closely held businesses performed valuations professionals. The National Association of Certified Valuation Analysts services issues standards for professional practice conduct and valuations report writing standards.
At American Fortune we have performed company valuations in all areas of the USA