Business Valuation Blog | Understanding Buying / Selling a Company

How do you determine the value of a business over its competitors?

Posted by Business Valuation Specialists LLC on Sep 12, 2018 9:20:00 AM

Whether you are selling an established business or looking to raise money for a startup, it's important to be able to demonstrate the value of your company vis a vis the competition. This is something many business appraisals fail to take into account, yet it fundamental when you think about it: How can an investor decide whether a company is attractive without understanding where it fits in the market? Find out how to get the valuation of a business over its competitors. 

Market-based approaches to business valuations see where a company fits in the market. For publicly traded companies, the Guideline Public Company Method makes sense. This form of business appraisal looks at prices that investors paid for businesses like yours, for instance how much similar businesses raised in Series A rounds. 

If the business is not publicly traded, the Guideline Company Transactions Method may be used. In this method, a business appraiser estimates the value of companies similar to your business. For example, an appraiser taking the value of a dental clinic may look for dental practices in the same city. When comparing your company to others, timeliness is key. Markets are always changing, so a sale that is a few years old may not speak to the value of your business at present. 

Tangible data is only one part of the business valuation equation. Any skilled appraiser understands that your company's personnel, knowledge base, and community reputation affect your market value. If you've been a family-owned business for decades and treat your clients as if they are family, this value cannot transfer with the business name and inventory. The connection is too personal. If your sales team is the best in the business and they're remaining with the company, on the other hand, the business value won't take as much of a hit. A skilled appraiser will ask the right questions to gauge the intangible essentials that make your business uniquely valuable and provide a thorough appraisal that communicates your value to investors or potential buyers. 

When comparing your company to others like it, an appraiser will look at your position from a multitude of angles. There may be some areas where your company is dominating the competition, but there may be areas where your company is lagging behind. By looking at it objectively, the appraisal will deliver an accurate valuation of your position in the industry. 

If you're thinking of selling the business down the road, it can be helpful to get a business appraisal in advance, so you can see where you fall in the marketplace. Knowing what you are worth compared with your competition, you can make informed decisions over business improvements with the goal of boosting your position in the marketplace when you're ready to sell, so you can maximize that return on investment.  

No matter which method your appraiser decides to use to value your company vis a vis its competitors, they should be able to talk you through the appraisal in clear language and explain how they arrived at the business valuation listed on the appraisal. 

You've only got one chance to impress investors with your offering, and a solid business valuation is one part of this package. Now that you understand how the local market affects your business value, you can select an appraiser who demonstrate familiarity with your industry, your market, and the business appraisal process. 

Tags: how do you determine the value of a business

How Do You Determine the Value of a Business?

Posted by Business Valuation Specialists LLC on Feb 22, 2017 12:46:00 PM

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It doesn't matter whether it's time to sell, pass the hat to the next generation or just get a better picture of where your business is heading, determining the valuation of a company can be a very complex, confusing process for many business owners. How do you determine the value of a business? The world of business valuations involves several different approaches to help answer that question. Here are the basics to help get you going.

How do You Determine the Value of a Business?

There are several key approaches that are used and methodologies within each one, depending on what your situation is:

  • Asset-Based: Though this is often the one most business owners turn to, it's also the least accurate of a healthy business. An asset-based approach uses the value of the business' assets alone. The problem with this type of approach is that it doesn't account for the business' goodwill or its future earnings. For that reason, it's typically only used in liquidation situations, such as bankruptcy. It can include a number of different approaches, but if you ever deal with an appraisal company that is basing the valuation of assets in the company books, you'll want to proceed with caution when selling, especially if you have fully-depreciated equipment or assets that are still in operation in the business. Using a book value approach means that those pieces of equipment are essentially being given away in the process rather than holding their actual value to the business.
  • Income-Based: When you sell your business, you're not only selling the assets, you're selling future income. For that reason, income-based business valuation is one of the most popular types of business valuation used in small and medium privately-held businesses that have enjoyed steady market conditions for a period of time. Generally speaking, when a company has had a steady cash flow over the years, it will be appraised using capitalization of earnings approach to reflect that regularity. In contrast, a company that has had irregular income will often be valued using a discounted earnings approach.
  • Market-Based: You may want to consider a market-based approach to business valuation. Why? Because when an industry is in a period of rapid growth, past income may not reflect future potential accurately enough. During these times, a market-based approach looks at businesses that have sold recently that have particular similarities to the business being valued. This method can use multiples of discretionary earnings or gross revenue, the sale price of a similar transactions. In the last two methods, the sale price is adjusted for any differences between the companies to come up with the best fair market value for the company being appraised.

So how do you determine the value of a business? By this point, you know that business appraisals are just as flexible as the circumstances that demand them. If you need help determining the valuation of a company, we can help.

Tags: company appraisal, how do you determine the value of a business