Business Valuation

Introduction:

Business valuation is the process of determining the economic value of a business or company. Business valuation simply means determining what the company is worth. It’s a way to look at the risk of owning the business, the potential economic benefits for the owners of a business, and the true value of the company. Some professionals call this a business appraisal, and there are a number of different ways to look at this key performance indicator for a company.

This valuation is typically done for various reasons, such as selling a business, mergers and acquisitions, raising capital, estate planning, or financial reporting. The goal of business valuation is to estimate the fair market value of the business based on a comprehensive analysis of its assets, liabilities, financial performance, market conditions, and other relevant factors.

Business Valuation Report:

There are several reasons any corporate may want to consider creating a business valuation report. First, when the company want to sell it, get a loan, or defend your business in a legal dispute, for the same ’ll need to set a valuation on the company itself. The business Valuation report is also required when the company is looking for adequate insurance coverage for your company. Eventually, it (i.e. Business Valuation Report) will be able to show how your business has grown over time and help predict what it might become in the future. That can be a huge help should you have a partnership agreement in mind or should you ever wish to sell it and move forward.

Create a Business Valuation Report:

There are many ways to create a business valuation report, but they all start with gathering the data itself. In case the company want to work with an outside party to compile this report, initially they may ask what your goals are with the report. After all, it’s one thing to want it on paper for future reference. It is another thing entirely to accurately offer information to an insurance company.

The next step for the company is to start gathering secondary data. In that case, the company require financial statements for the past three to five years, as well as those that are most current. Usually, this includes a balance sheet, an income statement, and a cash flow statement. Additionally, the company is supposed to provide at least two years of tax returns, a list of tangible and intangible assets, any forecasts, or projections that might have available, and a business plan. 

The process of compiling the report can be handled by the internal finance team. Handling it on your own can save some money and time, but working with a professional means the company get a detailed look at exactly what your business is worth from almost every aspect, and that can help to fulfill the company’s goals. 

There are three main approaches to business valuations. 

1.     Assets Approach: This method values the business based on its assets and liabilities. The two main asset-based approaches are the going concern approach, which values the business as if it will continue operating, and the liquidation approach, which values the business based on the assumption that it will be liquidated.

2.     Income Approach: This method focuses on the present value of the future income or cash flows generated by the business. Discounted Cash Flow (DCF) is a commonly used income approach method. Usually, an appraiser uses a weighted average of historical data to determine what the cash flow might look like in the future.

3.     Market Approach: This method compares the business to similar businesses in the market that have recently been sold or are publicly traded. Comparable Company Analysis (CCA) and Comparable Transaction Analysis (CTA) are examples of market approach methods.

The timing of a business valuation doesn’t matter. While most companies do it as part of the succession planning process or as they look to merge with others or raise capital, many more do it just to help better plan the future of the company.