Are you wondering what your business is worth? If you are, do you know how the value of your business is calculated? Unlike public companies, which are often valued at least partially based on the cost of their shares on the open market, a privately held business valuation uses a variety of methods to determine your company's value. But exactly what kind of methods are used in this process? Here's a quick overview of common business valuation methods used on privately held businesses.
An Overview of Privately Held Business Valuation Methods
Guideline Public Company Method
Are you wondering what your company may be worth if you go public, but don't want to go public until you have an idea of what that value may be in case you can take advantage of other options for financing? When your business has a great deal in common with a publicly-traded company, such as being in the same or a similar line of business, similar revenues or other areas in common, a business appraisal specialist can take the financial data that is available from a publicly traded company. This type of valuation takes the actual price paid by investors to gain a minority interest in that company.
Guideline Company Transactions Method
Another method that uses information from publicly traded businesses, it's most commonly used to calculate the value of several closely held businesses that are in a similar or same line of business as the company that is being valued. The companies that are being compared in this situation must have very similar aspects, such as the size of the business, the products or services being produced, the industry and the regional location. In this situation, business sale transactions that are more recent are considered to be more accurate and meaningful that business sale transactions that are more dated.
Capitalization of Earnings Method
If you don't want your business compared to a publicly traded company but would rather determine what your company is worth based on its income, the capitalization of earnings method can provide a solid answer. This valuation method is applied by taking a company's historical cash flow and projecting it into the future. The appraiser will study the company's financial history, make corrections for extreme or unusual transactions and create a normalized income estimate based on this information. This income estimate is then projected over a period of time to determine the company's value. It provides the most accurate results with businesses that have tended to have a consistent income level and cash flow over an extended period of time.
Discounted Earnings Method/Discounted Cash Flow Method
Another valuation method that uses income and cash flow to determine a company's value, the discounted earnings method, which is sometimes referred to as the discounted cash flow method, is used when a business has unstable or irregular cash flow. It can be applied very well to determine future value.
By understanding the methodology used in a privately held business valuation, you can better understand how market forces, income, transactions and discretionary earnings can impact your company's value. However, it's important to make sure that when you're having a business appraisal performed that you use an accredited business valuation specialist. The certification process ensures that the appraiser you're working with has the expertise, knowledge and experience to properly calculate your company's value.