If you want to know the value of your business, it’s important to seek the help of an expert to find the right business value. This is done through a business valuation, which is a process in determining the economic value of a business. Having a business valuation will help you get the value of your business, assets, incurred income value, etc. In this article, we explain what a business valuation is, why it is important, and how experts value a business.
Value your business
When your firm is valued, you can tell an investor, stakeholder, buyer, or banker that it is worth X amount and that if they want a Y portion of it, they will have to pay Z amount. A business valuation is critical for both investors and buyers. It is highly essential for businesses to know their value. Business value is created when you are able to scale it to a level. Assets minus liabilities equals business value. Anything with monetary worth, such as real estate, equipment, or inventory, is considered a business asset.
What is a business valuation?
The process of determining the economic value of a whole firm or company unit is known as business valuation. For various purposes, including sale value, establishing partner ownership, taxation, and even divorce proceedings, company valuation can be used to evaluate the fair value of a business.
Importance of business valuation
Business owners invest a lot of time and effort trying to increase their firm’s value by creating growth plans with clear objectives. These plans are intended to maximize value over time, but achieving those goals might be difficult if you don’t know where to start.
When the owner gets their business valuation, they get various benefits. For instance, they get the actual value of their company’s worth, assets, the current market scenario, and incurred income value.
Once the owner starts understanding the value of their business, it makes it easier for them to increase the future revenue and market products better. Business valuation experts can also help you find operational inefficiencies and improve cash flow, all of which add to your company’s worth.
How do experts value a business?
A business valuation includes a review of the company’s management, capital structure, future earnings projections, or market worth of its assets. Evaluators, firms, and sectors all utilize different tools for valuation. An examination of financial records, discounted cash flow models, and similar company comparisons are all common techniques to business valuation.
Tax reporting requires valuation as well. The Internal Revenue Service (IRS) mandates that a company’s fair market value be determined. Some tax-related actions, such as the sale, acquisition, or giving of a company’s shares, will be taxed based on their value.
Key considerations experts choose to value a business
There are a few considerations that the expert keeps in mind to determine the value of the business, which are as follows:
- Future Financial Performance – The future financial performance is based on the decision made by the experts and the finance department. In case if any of the losses are incurred, one can manage them if future planning is already done.
- Strength of Brand – The brand generates more revenue and value for the business. The owner should always work on building the brand value, and once the customers start liking the services, the business will grow without spending much money on marketing.
- Customer Base – The customer base should be maintained, how the customer got to know about the services and how the customer’s experience was. There should be a separate folder for the customer base.
- Experience and skills of the management team – The management team’s skills are extremely important, and they can either generate profits or make losses. It’s important to work on both parts.
- Synergies with the buyer – Your buyer can become your biggest asset when it comes to matching connections with them. Once you have strategically acquired the buyer’s trust, they can bring you more value and business.
- Achieving a successful company sale – One trick to increasing sales is to disclose outcomes with potential customers. This allows them to understand how they can grow and scale their business or meet a personal need; it also makes it simpler for them to buy what you’re offering because they can see results. Customer testimonials can be very handy in this situation.
3 Main approaches experts choose
The main approaches that the experts use to determine the value of the business. These approaches are extremely important to determine the valuation. Here is a detailed description of these approaches:
The cost (or asset-based) approach derives value from the sum of the business’s net assets’ fair market value (FMV). This method typically yields a “control level” value or the value to an owner who has the authority to sell or liquidate the company’s assets. It has drawbacks such as failing to account for unrecorded intangibles and relying on past costs instead of current FMV. When converting book values to FMV (recorded and unrecorded), the adjusted net asset approach accounts for all intangibles and liabilities.
When reliable market data is difficult to come by, the business valuation expert may use the income strategy. This method calculates the present value of future predicted economic advantages, such as cash flow. This method is best suited for established, profitable firms since it based value on the business’s ability to deliver future economic benefits. Instead of employing a capitalization rate, a discount rate is used to discount all future cash flows (including the terminal value) to present value. Like the market approach, the income strategy can provide control or minority-level value depending on whether discretionary changes to future economic gains are made.
The value of the subject business is determined using sales of similar businesses or business interests in the market approach. Because data on comparable public companies is publicly available, it’s especially beneficial when valuing public companies (or private companies large enough to consider becoming public). Under the market approach, the level of value that’s derived depends on whether the subject company’s economic variables have been adjusted for discretionary items (such as expenses paid to related parties).
Experts methods to value a business
To value a business, experts look at many factors. It’s important to remember that valuing a business can sometimes be complicated. Here are some methods that experts use to value a business.
Forget about capital assets when valuing your business
It’s not about how much money your company is worth; it’s about how much cash it has on hand. A buyer isn’t concerned with the amount of money they can make from the sale of your office building. They want to know how much money they can make by selling the goods and services produced there.
Work out profitability by being aware of gross income and all outgoing payments
A company’s valuation is all about how much money you’re making now and how much money you’re going to make in the future. A buyer wants to know how much money they’ll make if they buy your business. After all expenses and income are accounted for, the total amount of revenue left over is your net profit margin, commonly known as your bottom line. This is your entire profit margin, sometimes known as your “normal” profit margin. Cost of goods sold (COGS), operational expenses, debt payments, taxes, one-time payments, and investment income factor into your net profit margin.
Calculate the value
This is the part that everyone dreads: doing the arithmetic to figure out how much your small business is worth. It shouldn’t take long if you keep good records. Still, if you’re in the middle of liquidating capital assets in preparation for an exit strategy that entails selling your company, it may take months simply to get ready to do the math. The formula is straightforward: the value of a company is equal to its assets, less its liabilities. Anything with monetary worth, such as real estate, equipment, or inventory, is considered a business asset. Business debts, such as a commercial mortgage or a bank loan used to purchase capital equipment are examples of liabilities.
Factor in your market valuation
Your market will have a huge impact on your profitability in the next few years. Consider the following scenario: If you’re in a market that’s well established and steady, you’ll probably be better off using historical data because there will be little volatility. If you’re entering a new market, you have the potential to raise your sales significantly.
Accept the will of the market
If the market doesn’t support your figures, you may have to compromise. You can’t afford to be stubborn with your figures if you need investment to survive or can’t wait to sell. A company is only worth what the market will pay for it. “If your industry has been hit heavily by the coronavirus, for example, you may be able to value your company significantly higher than the market,” Choros said. Even if your brand is worth a lot more money or your financial records suggest that you are worth more, things like timing and the higher need for your business in the marketplace still matter. Leverage is a constant in business. You don’t always get what you want.
10 Best Experts tips to increase your business value
These are the tips given by some of the experts to expand the business valuation:
CFIMITYM stands for “cash flow is more important than your mother”. It’s a term used in the business valuation where understanding your expenses and the cost of products and services are the most important areas that help increment the business value.
Develop a strategic plan
Strategic planning is a process by which leaders of organizations decide their long-term vision as well as their organization’s goals and objectives. The process also includes determining the order in which those goals should be achieved to achieve its stated vision. It is really important to develop a proper strategy where one can develop ideas to scale up their business value.
Plan to sell your business
It’s important to understand what you are offering to the customers and what benefits you can offer that your competitors are not offering. You can then market your products and services and start selling them. When it comes to selling your business or organization, you want to make sure you obtain a fair price. The asking price should be appealing to potential buyers, but you should not undervalue the property.
Don’t fall into a common tax trap
It’s important to be aware of your accounts and finances. You will end up paying more tax if you are not able to manage your accounts. Handling finances is always hard, so it’s important to have a proper department that handles all financial matters. An objective appraisal is frequently required when you need to negotiate with banks or other possible investors for capital. Professional verification of your company’s value is often necessary because it improves your lender’s confidence in you.
Form an advisory board
Having an advisory board can help you manage business operations, manage, and take financial decisions. An advisory board is a group of experts who helps you make wiser decisions. Most experts consider valuations to be a critical component of sound decision-making in firms, both now and in the future.
Be a know-it-all
A business owner must be aware of the current market scenario and should know everything about his business. One cannot understand the whole market scene, but one can always learn about them. It’s important to have a better understanding in terms of business and market. Businesses grow when scalability is based on potential customers and clients.
Attract the next generation of workers
While employing any employee, it’s important to hire young minds. It might take some time to train them, but the new generation of workers will help you expand the business more exponentially with the guidance of the advisory board. When business owners choose low-cost appraisals, they typically overlook the substantial advantages that come with doing a complete valuation analysis with trained valuation consultants. Business owners can negotiate a tactical sale of their company, devise an exit strategy, secure funding, and lower their financial risk during a lawsuit.
Create a business toolbox
Creating a business toolbox means taking care of the entire business in one place. The business owner must be aware of the expenses that can be incurred, and the details should be mentioned in one particular way, which can act as a business toolbox. The toolbox can also be managed by any external organization which the company can outsource. It reduces a lot of time and efforts for planning the valuation.
Make strategic acquisitions
A strategic acquisition is a mechanism by which one firm acquires or purchases another in the hopes that the resulting merger will be more profitable than either company alone. Strategic acquisitions are frequently made because one company believes it may profit from working with another company.
Don’t try to do it alone
You cannot determine the value of your business all by yourself, and it’s important to analyze the market and get the valuation done by the expert. It’s important to have a second opinion. Business valuation is a key financial analysis that requires the expertise of a valuation professional with the necessary credentials.
Get expert assistance to value your business with Eqvista!
At Eqvista, our highly experienced valuation team can help you determine the value of your business. Getting a valuation has become an important aspect of scaling up your business. Contact us to learn more about our valuation services.