As a small business owner, or perhaps a person responsible for making financial decisions on behalf of an organization, you understand the importance of business valuation. For both internal growth rate benchmarking as well as public opinion and appeal, understanding the ins and outs of business valuation is key.
If you’re new to the world of business financial reporting, let us help you get a better grasp on how understanding business valuation methods can help you better stay in control of your financial operations.
Calculating Value
Let’s start by defining what, precisely, business valuation is, and why it matters so much to a company.
In simple terms, business valuation is the process of determining the value of a business. The word “process” indicates that a valuation is not a single step or number, but an ongoing analysis of the business to determine the overall worth, as well as the worth of its departments (if necessary).
Why are business valuations important? You may want to sell your business, but first, you need to understand exactly what it is worth. You might be looking to provide a detailed analysis of your net income to set goals for future profits. Or, maybe you’re detail-oriented and want your balance sheet to show an accurate and to-the-moment representation of your company’s standing.
Whatever the reason for calculating the value of your business, it can be tricky to go it alone.
Sure, from a high-level perspective, a company’s numbers might seem pretty cut and dry. Over a period of time, there are costs of capital, cash flow, taxes, salaries, and other costs. And you might think that it’s just math, right?
The reality is that it can be more complicated than that.
Many small businesses turn to professional business valuation services to assess these numbers, since they tend to see a more complete picture. In a sense, business valuation firms can see the story in the numbers, as opposed to just the arithmetic. And don’t misunderstand, the calculations are important — but the overall narrative is even more so.
Methods for Business Valuation
Since each business is different, it would make sense that business valuation methods would differ as well, even for similar businesses. And while the details will differ, there are tried and true methods for assessing business valuations. They might not all be applied for each business, but they establish a framework for determining value.
1. Market Value
Market value is a common method for determining business value. For larger companies, this method considers the share price of a company. This is a commonly accepted valuation method, though it doesn’t get into the details of particular costs.
Similarly, when this method is applied to a small business that doesn’t have a share price on the public market, then it’s common to review comparable companies. Once again, this might seem more general in nature, but it is commonly accepted enough. And it’s another reason to have professional business valuation firms handling the discussions and reviews in this instance.
A relatable example would be purchasing real estate. When purchasing an office building or even a new home, your real estate agent will analyze not only the particular aspects of the property, but also comparable properties.
This information can be used as leverage in one direction or the other. It goes back to the context of the numbers, and the story they tell, as opposed to just the arithmetic.
2. Discounted Cash Flow Value
Discounted cash flow is a valuation method that assesses earnings and forecasts future profits and revenue. This is a common method of valuation because owners and stakeholders want to know what their business will be valued at in the future as much as right now.
However, since this method relies on forecasting, there is room for error. Naturally, there are advanced techniques for measuring and forecasting future profits, etc., but like any forecasting method, it is not foolproof.
3. Asset Value
This valuation method is not to be confused with income value, which we will discuss in just a moment. Looking at the assets of a business means everything that it owns, from its equipment to its property to everything in between. All of these assets have a very definite value. By going through and analyzing everything, this valuation method can provide an accurate picture of how much current value resides within a business.
4. Income Value
Similar to asset value, income value considers how much money is coming in the door. This will be compared to capital costs, expenses, and all other costs that the business is responsible for. At the end of the day, a gain of consistent income over a period of time demonstrates strong value for a business.
Similar to asset value, this valuation method takes an accurate and current look at the state of the business. It doesn’t forecast or consider comparable companies, but simply runs the numbers. And yet, as you know by now, numbers need context, as is true of all of these valuation methods.
Partner With Professional Business Valuation Services
There is no cut-and-dry method for business valuation. Rather, there are many. Depending on the type of your business, and your intention for turning to business valuation services, one might be better suited for you than others. But that’s for the professionals to decide.
Establishing a value for your business is a big job, and it needs to be done right. Do yourself (and your business) a favor by letting Joey Friedman conduct your business valuation today!
