Business Valuation Blog | Understanding Buying / Selling a Company

How Much is the Business Your Running or Buying Worth Today?

Posted by Business Valuation Specialists LLC on Sep 27, 2021 8:00:00 AM

Business Valuation Appraisal Appraiser Business Sale What Is It Worth

Whether you want to buy or sell a business, you need to know how much the company is truly worth. To understand this more accurately, you will need to engage in a formal independent business valuation, preferably completed by a certified appraiser. There are various approaches for determining value when performing a business appraisal, and the valuation professional can assist in understanding the best methodologies for the business involved. Here are some of the ways an appraisal is analyzed:

Market-Based Approach

For an active company, a market approach can be one approach that measures fair market value and overall position in a competitive environment. Within this approach, there are different methods to consider, including those for public and closely-held businesses, as well as basing it on a multiple of gross revenues or discretionary earnings. Depending on the specifics of the business, one or more of these approaches is utilized and weighed in the analysis

Income-Based Approach

An income perspective can be useful to value companies of all sizes and is particularly effective for firms that operate with a capital investment intensive structure. One method within this approach is the Discounted Cash Flow method, in which an appraiser gauges future revenue five years down the road, and discounts this to determine the present value and ultimately a fair sale price. This can be beneficial for companies that experience varying levels of cash flow and earnings each year.

A second method under the income approach is called Capitalization of Earnings and uses EBITDA (earnings before interest, taxes, depreciation, and amortization) to estimate a single point-in-time value for the company using its cash flow. This method can best work for operations that experience steadier cash flows and have demonstrated consistent growth.

Asset-Based Approach

This approach focuses primarily on the tangible assets of the business while making adjustments to the company’s book values and goodwill in an effort to estimate value for firms with high levels of capitalized investment, such as real estate machinery & equipment and personal property.

There are certain methods that can work best within this approach, with an initial focus on depreciated book values while adjusting for current market value using tangible asset appraisals to complement the business valuation

In summary, the business appraiser considers and weighs these approaches that factor tangible and intangible assets, revenues, profits, markets, industries, and all other relevant components into the equation, to reflect the overall value of the company. The appraiser may ultimately determine only one approach makes sense while in other instances utilizes several into the appraisal analysis to ensure the most reasonable conclusions.

Tags: Market Approach, Income Approach, Asset Approach, business valuations, business apppraisal, how much is a business worth

Exactly how do you figure out how much is a business worth?

Posted by Business Valuation Specialists LLC on Mar 22, 2017 4:01:00 PM

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How much is a business worth? This question has plagued business owners for centuries. Unfortunately, the answer to that question, as to so many in life, is that it depends. What are you trying to do with the business? Why are business appraisals needed at that time? Will the current market conditions change the valuation of a company compared to a year from now? How does today's business owner figure out what their business is worth? Here's some quick insight into how a business is valued and the process that is used to calculate that value.

Exactly how do you figure out how much is a business worth?

Determining business value is a complex process. It involves looking at the business' individual practices, market share, goodwill in the community and income levels. It can also involve the market and industry conditions, the urgency of a sale, the perceived value of the company's brand and any number of other aspects that are often dismissed as inconsequential to the business value as a whole.

Part of the calculations are based on why the valuation is needed. If you need a valuation of your business because you're considering expanding and want to make sure you're on solid financial footing first, you'll need a completely different valuation than someone who is having to quickly sell a business to settle an estate due to an untimely death or the dissolution of a partnership or marriage.

Another area that can come into play is the current industry and market. If the business is positioned to take advantage of new technologies or innovations in the industry, the business' value to drastically increase beyond what the business owner may otherwise calculate. If, on the other hand, the business is floundering due to industry changes or poor market conditions, using an older business value may leave you open to risk as you overextend your credit trying to keep up with poor economic conditions.

Simply basing your business value on similar businesses that have sold recently may not give you an accurate view of your business' value either. If the business you are comparing to has a more favorable location, better position in the industry, specialties that you have not diversified into, different income levels or other aspects that impact the business' overall value, you may be under- or over-valuing your business' actual worth. 

Is your business a household name or a newcomer to the industry? This can make a big difference in how reactive your business will be to changes in market conditions. What about your reputation? A good reputation will often improve your business value as your customers perceive a higher value to the products and services you provide when compared to a competitor.

As you can see, the question of how much is a business worth is a very complicated one that requires significant experience to accurately answer. Fortunately, as a business owner, you don't need that experience. A business valuations specialist who has experience in your industry and special area of operation spends their days looking at businesses like yours to determine those values using standardized methodologies developed for specific situations.

Tags: business value, company valuation, how much is a business worth