Any entrepreneur is bound to constantly think about the value of their business. And while this is an important aspect of running a business, have you had a professional valuation of your assets?
More often than not, business owners have a biased opinion about their company’s value. This bias often stems from involving sweat equity when thinking about their business’s value. Sweat equity refers to the literal blood, sweat, and tears that you had to put into your idea until it became a profit-making establishment. Unfortunately, that means nothing to people considering to invest or buy your business. As such, you need to have an accurate depiction of your business’s current financial standing.
This article will discuss what business valuation is, and tips to help you get an accurate valuation. Read on.
What is Business Valuation?
This refers to the process of determining the accurate economic value of a business. You might want to have your business valued for a number of reasons. These include: finding out your sale value, when looking to merge, or when you want to separate. To obtain an objective valuation, it is imperative that you seek the services of a professional business valuator.
Business valuation is a recurring topic in corporate finance. The aim of this process is to determine the worth of a business, by utilizing objective measures, while examining the various aspects surrounding the enterprise. As such, the valuation might involve analyzing the company’s capital structure, its management, future earning potential and the current market value of its assets. The methods used to perform the valuation vary between businesses, industries, and valuators.
The following are the top five tips every business owner should know when it comes to valuation.
1. The Methods Used
There are various valuation techniques available, and they include:
• Market Capitalization
This is the most basic valuation method, and it involves multiplying the business’s current share price by the total number of its outstanding shares.
• Times Revenue Method
This valuation techniqueinvolves applying a stream of revenues that have been generated within a certain period to an industry-specific multiplier.
• Earnings Multiplier
Here, instead of considering sales revenues generated within a certain period, the earnings multiplier uses the company’s profits in its calculations as they depict a more accurate picture of its financial success.
• Discounted Cash Flow
This technique is similar to the earnings multiplier method, in that it operates under the premise of future cash flows. These are then adjusted so they can portray the present value of the business. Even though the earnings multiplier and discounted cash flow methods sound the same, the main difference is that the latter takes inflation into consideration when calculating the current value.
• Book Value
This refers to the shareholders’ equity value in the company as portrayed in your balance sheet statements. You calculate book value by subtracting your total business liabilities form the total assets of the business.
• Liquidation Value
This refers to the net cash that your business would receive if its assets were to be liquidated and liabilities paid off today.
Nonetheless, the above are not the only valuation methods out there. There are numerous other valuation methods, with some being more accurate than others. This is why getting a professional valuator is important as they know which techniques depict the most objective picture of your business.
2. Valuating the Non-Measurable
Your business’s worth is what someone is willing to pay for it. As such, when you are considering to sell, it is also important to include the intangible assets that do not reflect their value directly on the balance sheets.
For instance, does your company have valuable relationships with its partners, suppliers, and customers? If so, this might raise interest in the buyer, thus raising its value.
Do you have a strong management team and workforce? If so, it signifies the buyer that your business is valuable.
The point being put across here is; buyers will look for every risk involved in purchasing your company so they can get it at a lower value. However, by showing them the value of your intangible assets, your entire business’s value will go up.
3. Getting Your Affairs in Order
If you are looking to sell your enterprise, it is imperative that you get everything straightened out so that your cash flow is not off-putting suitors.
Therefore, ensure that you take care of any financial irregularities and have them looking good so that your company looks like an opportunity, and not a risk. As such, careless mistakes that might be inconsequential to your operations such as, lacking detailed records, not having an accurate picture of your revenue generation, or lacking a certain software could potentially signal the buyer that your business is a risk, even when it isn’t.
4. Be Realistic
Like stated earlier, many business owners have a biased opinion about their business’s worth. While believing in your worthiness is a good thing, being objective about it is better, especially if you are looking to sell your business. Buyers are not concerned about the late hours you had to put in to grow the company, their only concern is its profitability.
As such, getting a valuation is imperative as it will allow you to know where your business really stands, financially. Moreover, even if you are not selling, by getting to know your actual financial standpoint, it will bring you back to reality and realize that the business might not be performing as well as you thought it was. This allows you to make the necessary changes.
5. Obtaining Professional Business Brokerage
Even though this article outlines the various methods you can use to perform a business valuation, it is
hardly exhaustive. Business valuation is an intricate process that involves taking into consideration
multiple aspects so that you can get an accurate depiction of your worth. As such, it is best to leave that
job to the professionals whose expertise is determining the precise worth of entities.
Moreover, getting a professional ensures that they will not involve emotions in the process, as you will
most likely do. These individuals will give you hard facts and figures. Additionally, they will clean up the
mess to ensure that your business looks pristine when it comes to selling.
Conclusion
Business valuation is not only important for businesses looking to sell, but also for companies that are
looking to grow. Getting a valuation allows you to see the holes in your business that you never knew
existed. It allows you to change those weaknesses into opportunities.
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