Whether you need to sell your business, divest from a partnership, or simply want an objective business appraisal, a business valuation can determine a fair market value for your business. Here are 7 steps the pros use when conducting a business valuation.
7 Steps to Effectively Value a Business
1. Review business history and purpose of valuation - While business data will tell the financial story, context plays a key role too. Many business appraisals begin with a succinct review of the business history; for example, an overview of the small town accounting firm and its competitors. Additional factors that affect business valuation include distance to nearest highway or major city and existing relationships wth clients. This information adds to the valuation and gives a potential buyer valuable context to consider in their offer. A manufacturing firm with four local clients and one competitor would be worth more than a similar firm with one local client and four competitors, for example.
2. Determine valuation standard - Business appraisers choose among common standards when evaluating a business. An appraiser will list out any standards used to determine the business value, such as the discounted cash flow, adjustable net asset, multiple of earnings, and so on. This keeps everyone on the same page, so potential buyers can compare like with like.
3. Compare to similar businesses - While your business has unique attributes, it also shares much with businesses in the same niche. When evaluating a manufacturing company, for example, a business valuation expert will review companies of the same size that manufacture similar products. Knowing what competitors have sold their business for gives context and has statistically been shown to be an accurate predictor of business worth.
4. Review assets and liabilities - Reviewing assets can help determine company value in cases where you are closing down the business. If this is the case, it may be necessary to also have a machinery and equipment appraiser value the assets that could be resold. These will be appraised for their liquidation value since the business would be worth more sold off by pieces then by being sold as a going concern.
5. Check financial statements - Financials statements do not always paint a full picture of business financials. In many cases, financial statements undervalue the business for tax purposes. Still, business valuation specialists will want to review the tax documents and financial statements of a company during the company valuation process.
6. Estimate future earnings - Is the business taking off or is it flat? A business growing needs to put together projections for what the next 5 years are looking like in regards to revenue, expenses, and earnings. In some cases, factoring future earnings in to the business valuation makes sense.
7. Synthesizing the information - Each of these metrics paints a portrait of the company's value. To determine an objective business valuation, an appraiser will synthesize the information obtained to create a clear and compelling business value proposition.
These steps, or some subset of them, will help professionals evaluate your business. The process can be a lengthy one, but it is worthwhile to have an independent estimate of business value.
Since it can be difficult to be objective about your business's value, we recommend seeking a professional business valuation from a neutral third party. Once you obtain a business valuation, you can move forward with your plans to sell your business, alter your business plan to improve your valuation, or move ahead in your desired way.