Business Valuation Resources

Business Valuation Resources: An Introduction

Gaining an accurate understanding of the value of your business is essential for every business owner. Usually, this step happens when an owner is ready to sell, but it can happen at any time before that decision is made. There are plenty of reasons why a business valuation should be done ahead of time. You are able to get information on what the company is actually worth to potential buyers. You are able to direct your business toward an envisioned future, using your valuation knowledge to achieve the highest possible return on the work you’ve invested.

This is why knowing the value of your business is about more than just the sale. It can help you direct future business initiatives, navigate partnership opportunities, and plan an exit or succession with ease. However, it is true that the business valuation process is definitely more art than science. There are several theories on how to approach it, depending on the industry and a wide variety of resources available to help you do it.

What Data is Included in a Business Appraisal?

When it’s time to conduct a business appraisal, you’ll dive into the numbers. Financial and other types of data are necessary to complete an accurate business valuation. A business appraisal measures the total worth in assets (and estimated future value) of your company.

It might require a number of different types and sources of data. Getting your books in order is the next step. Any one of these data points might be requested in the process of receiving a business valuation:

Revenue history
Tax filings
Profit and loss statements
Company size and growth rate
Market position/competitive analysis
Tangible assets (like property, equipment, vehicles ect)
Intangible assets (like brand recognition/customer loyalty)

Ways to Conduct a Business Valuation

It’s important, when calculating the value of your business, to pay attention to the industry data and standards available for businesses of your size and type. A deep understanding of your industry will only help you to grasp the demands of the current market and what factors might influence your sale price. For example, maybe you are in a business that is heavily seasonal or reliant on tourism. Knowing what time of year to sell your business is important because more than likely, its value will fluctuate seasonally. Business valuations are approached from many angles, but we will cover the earnings income approach, the market value approach, and asset-based approach.

Business Assessment: The Market-Based Approach

There are a few possible approaches to getting a business assessment. From a market value approach, a business owner can learn what their business is worth by paying attention to the competitive landscape. This means studying the outcomes received by other businesses of a similar size that have sold. A significant amount of research is necessary in the market value approach to be effective. If, for example, you are desiring to sell in an emerging sector—this type of valuation is important to paying attention to regulatory factors/economic considerations that may cause fluctuation.

Business Assessment: An Earnings Income Approach

The second type of valuation to pay attention to is an earnings income approach. This approach is common for mergers and acquisitions and is concerned with projecting future earnings and measuring a company’s value with that metric. Discounted cash flow analysis and the capitalization of earnings methods are two forks in the road a business owner might encounter if they are going with this valuation approach.

A discounted cash flow analysis calculates the value a business is expected to produce for its owner by calculating what risks might be involved in the purchase of the business and discounting those against the existing cash flow. Discounted cash flow is useful for businesses that might be young and lacking in historical data to make projected financial decisions, or those that experience volatility and need more time to demonstrate its growth potential.

A capitalization of earnings method uses net present values of a company’s existing cash flows to work out the expected rate of return. This is accomplished by dividing expected future earnings against a capitalization rate. For small businesses, this rate is typically anywhere from 20 to 25 percent.

A Certified Business Appraisal: Asset-based Approach

The last type of certified business appraisal method we will cover is an asset-based approach. An asset-based approach can be tricky depending on the size of the company. It involves a closer look at the different types of assets a company can contribute to its overall valuation. Business assets are diverse but include two primary types: tangible and intangible.

Tangible assets are considered things like equipment, inventory, vehicles, and property. In a sense, the asset-based approach is about taking stock of exactly what you have and assigning it a market value (as if you were liquidating the business.) This helps a business owner estimate how much value is invested materially in the business. If you’re considering liquidation rather than selling, this type of valuation might make the most sense, as it provides the best possible estimate of the present investment the business has today.

Intangible assets are a bit more subjective because they are not concrete. An example of an intangible asset would be something like a trademark, patent, intellectual property, or perhaps a brand-related metric like customer loyalty. Intangibles aren’t necessarily things you could sell off tomorrow, but they are characteristics of your business that inform its overall desirability to an acquirer.