Gauging your worth: Valuation of your business
It is commonly known that a business valuation is required when selling a business, but it is also important to have on hand for many other reasons, including to determine the buy-in price for an additional owner, to help plan your exit strategy, and to deal with a divorce or shareholder dispute issue.
Although a business can represent the most valuable asset of an individual’s net worth, most entrepreneurs do not know the value of their company. Often, their perception of value can be inflated by their personal attachment and emotional investment in the company. So how is the value of a business actually determined?
There are two main approaches to business valuation: The Going-Concern Approach, which itself is comprised of a number of different methods, and the Liquidation Approach.
The Going-Concern Approach covers three methods of business valuation. The common thread is that the going-concern approach assumes the business enterprise is profitable, with the potential for future earnings. The three methods use different indicators to determine the fair market value of the enterprise.
As the name would suggest, income-based methods of valuation are those based upon the income of a company. If a business has a stable income that isn’t expected to fluctuate significantly in the future, the value of the company can be accurately gauged according to its past performance and an assessment of its “maintainable future earnings”. The maintainable earnings are multiplied by a multiplier to determine the fair market value of the business.
If the income is likely to be significantly different in the near future, or if past performance may not be indicative of future expectations, a “discounted cash flow” method may be applied. In this case, a projection of future earnings is used and the projected future earnings are discounted back to present dollars to determine the fair market value of the business.
The market method determines an indicator of the value of the business by using prices of other comparable companies that were sold in the marketplace. Also considered in the market method are actual transactions involving the subject company being valued, where shareholders have purchased shares in the company at various points in time. The metrics of these transactions can be used to provide a value of the subject company or as a reasonability test to support the valuation result using other methods.
Asset Based Methods
An asset based method of valuation is used when valuing a business with insufficient earnings for providing an adequate rate of return, or where there is no commercial goodwill that is transferable to a prospective purchaser. In these instances, the company’s assets and liabilities are adjusted to their fair market values to determine the value of the business.
A liquidation approach is generally used when the business being purchased is not currently viable. In a liquidation approach, the valuation of the company represents the amount that would be realized if the business is wound up.
Objective Valuations of Any Type
When it comes to your business, you need an objective valuation provided by experts who understand your requirements and the value catalysts of your business and industry. The team of professionals at Fuller Landau can help. Contact us today for a complimentary consultation.