Business Valuation Blog | Understanding Buying / Selling a Company

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.

Whether your company is expanding or going through a downturn, being purchased or sold, audited or invested in, refinanced or liquidated, it is important to understand the real market value of your business for you, your partners, employees and key third parties involved with your operation.

Obtaining a business valuation from a qualified appraisal firm such as Business Valuation Specialists can provide you with firsthand knowledge of the value of your company and what to expect should you wish to buy, sell, refinance or bring in new investors. A formal appraisal analysis and report can assist you in any number of ways as you move through the next phases of your company’s development and can be shared with third parties who may be assisting you with these project plans.

We will work closely with you to determine the critical information needed to complete the valuation analysis and answer any questions you may regarding the process. The experienced, certified appraisers at Business Valuation Specialists are ready to discuss the next steps with you. We look forward to the opportunity to work with you and your business as a key component to your ongoing business projects.

When you're deciding how to value your company, there are so many considerations to take into account to ensure your business valuation gives you the most accurate picture of your business' overall health. Should you use income-based appraisal? Or does a gross revenue multiple method make more sense? What purpose will your business valuations serve? Let's take a look at considerations when you're looking at valuation of a company.

How to value a company

Firstly, what's involved when you're figuring out how to value your company? Business appraisal is a complicated topic, one that many professionals spend their entire life learning about and applying to best suit their client's needs. The first step is to determine what your purpose is for business appraisals. Are you getting ready to sell or merge your company? Are you closing your doors for an asset liquidation? Perhaps you need to know where your company stands in the market compared to similar businesses and it won't work with the standard models. Any of these are common reasons for having a business valuation completed.

Why? Because knowing exactly what your company is worth helps you determine how to make business decisions for the future.

Which approach you should use

There are essentially three major valuation approaches to how to value your company. Let's take a look at each one, which methods are used and for which applications they work best.

• Asset-Based Approach: Book Value provides a fast answer, but it's not really accurate to your company's big picture since it is more of an "accounting number".  Adjusting to fair market value of the assets is a good approach.
• Income Approach: An income approach looks at what the business is projected to make in the future. There are two basic income approaches, Capitalization of Earnings used for steady, regular income and Discounted Earnings, also referred to as Discounted Cash Flow, which works with irregular income streams.
• Market Approach: The market approach observes what the market will bear and makes an assessment based on the sale price of similar companies which is then adjusted to account for the differences between the companies. These methods amy include Guideline Public Company, Guideline Company Transactions, or Multiple of Discretionary Earnings and Gross Revenue Multiple.

Why it's important to have a valuation specialist do the job

Though some business owners try to provide their own business valuation, they often find out later that the appraisal is not considered acceptable for financing, insurance or legal purposes. A valuation specialist only provides business appraisals, so they know the best approach and methodology to meet your business' needs.