There a variety of methods for valuing a business. While they are highly recognised, none of them are perfect. The real value of the business will be how much a buyer is willing to pay and how much the seller is willing to sell for.
A seller should have a value in mind for his company. It is advisable to have a bottom line number to look for in negotiations. The value must be concrete and provable to potential buyers. While obtaining this value may sound easy enough, getting the valuation of your business right takes preparation and thought.
Phases of Business Valuation
The business valuation with Interactive consists of four phases:
We gain the understanding of the requirements of your business and collaboratively define a specific purpose of the assessment.
Interactive gathers your business data from management interviews, research, document request lists and a facility tour.
The gathered data altogether with financial statements and tax returns subsequently undergo analysis and review.
Interactive processes the gathered insight using a selected valuation method. All results are then presented to our client and thoroughly consulted.
Methods of Business ValuationThe variety of methods for valuing a business all requires a careful analysis of the client’s business data. Below is a summary of several common valuation methods we use:
- Asset Value
The asset value method views the company as a set of assets and liabilities that are used as building blocks to construct the picture of business value. This value is useful for companies that are going to be liquidated. The challenge of this method is in the details. It can be difficult to determine what assets and liabilities to include in the valuation, choosing a standard of measuring value and then actually deciding on the worth of each asset and liability.
However, if the business is not based on assets, such as a property holding company, this will be less applicable.
This method takes the turnover of the company and multiplies it by an industry multiplier. Multiple of turnover is commonly used to value professional practices. You will have to do some research on the industry to find a comparable business and its industry multiplier. Although, this may not be a simple task due to variations amongst businesses. The other issue is that two different companies may have the same turnover level but different profit margins.
- Multiple of Profits
The multiple of profits method is commonly used for growing companies with a history of profitability. Profits are calculated and an industry multiplier is used. The industry multiplier can vary; it is based on business risk and industry standards. A good idea would be to look at comparable businesses being sold and to see the multiplier being used in those valuations.
- Cost of Creating
This method is helpful for computing the valuation of the company. It entails calculating the cost of creating the business from scratch. This method will give the cost of creating a business exactly like the one being valued. It includes buying all of the assets, creating a location, training staff, etc. This lets potential buyers know if it is a better decision to buy the existing business or to start their own company from ground up.
- Note on Buyers
An important thing to note on valuations is the subjective position of the buyer. Just as the seller has personal motivations for the sale, the buyer is the same. A buyer could be in a related industry and may be looking for a specific type of business to improve their existing company. These kinds of buyers will typically pay a premium if the company fits their needs.
However, even regular buyers looking for an investment can put a higher subjective value on certain factors. For example, a buyer looking to make an investment who doesn’t want to be personally involved with the business may be searching for a business that can run with minimal involvement.
From the buyer’s perspective, proof of future earnings and profitability are, by far, the most attractive qualities in a potential business acquisition. You can drive up the value of your company by documenting a multi-year track record of profits and positive cash flow.
These are just a few examples of the valuation methods that may be used. It is advisable to speak to a specialist to analyze your business and its industry to decide upon the most appropriate valuation method. Interactive can significantly shorten the sale process by ensuring your business is priced to move in the current market.