If you do decide to sell your company, you’ll still want to get the best value out of the deal. To do this, you need to know the exact value of your business before you enter into the M&A process. Valuing a business is a process that can have several ways to go about it, which depends on many things, including the type of business you are in. In this article, we’ll take a closer look at the process of conducting a business valuation, and we’ll look at the principles behind it.
What is a business valuation and why is it performed?
Business valuation is to determine the exact value of the company. Carrying out this process can be caused by a variety of reasons, but most often they are associated with investment decisions, strategies, planning to sell the business, or buying it before starting the IPO.
The appraisal process is conducted by a service specifically designed for this purpose, and their services, as a rule, are not cheap. Business valuation can take an indefinite period of time because, in order to determine the correct figures, experts need to study large amounts of documentation. Exactly these moments are the reason why large companies delay and postpone this process for a long time, even considering the fact that for them it should be held regularly.
But it is worth remembering that the economic situation in the world is unstable, and every change in it affects the financial condition of each existing organization. That is why it is recommended that business owners conduct an appraisal analysis on an annual basis.
Key methods of business valuation
Below we describe the most commonly used business valuation methods:
- Asset Valuation
A company’s assets are divided into tangible and intangible assets. In order to value a company based on them, experts determine the market or book value of these assets, meaning there is a tally of everything your company owns, stock, patents, equipment, money, and even customer relationships.
- Historical Earnings Estimation
This method of determining value takes into account your company’s gross income, the capitalization of profits, and your ability to repay debt. The faster the organization performs on debt repayment and the better it maintains cash flow, the greater its value will be.
- Relative valuation
In this way, you compare the worth of your holdings with those of a firm that is involved in similar activities. This is how you determine the relative value of a similar business and form a fair price.
- Evaluation of future sustained earnings
If you are confident in the stability of your business and the type of activity it does, you can apply the next appraisal method: the prospective revenues of your business define the cost of your current business.. To determine this, you take into account your expenses, sales, and profits over the past few years.
- Discounted Cash Flow Estimates
If you are still not too concerned about the future stability of your company, the following method of evaluation may help. It consists of having experts generate your company’s future net cash flows and discount the amount to the price you have today.
How often should a business appraisal analysis be done?
The frequency of a business appraisal may depend on the type of company, such as:
- Rarely or not at all – this can be done by small organizations that have no plans to sell their business or collect investments
- Once every few years – can be done by companies that are actively involved in investments or other projects
- On a regular basis – should carry out large companies which are involved in large-scale transactions