Finances

Value a business accurately with these strategies before you sell

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This guide outlines the best ways to value a business and ensure you get the best price before selling.

When running a business venture, it is paramount to be well-informed of all your business activities as well as your potential. Such activities include growth projections, the value of your business within your industry, among many other things.

Best ways to value a business

In this article we take a deep dive into all there is to know about business valuations as well as the best ways to value a business when it comes time to offload it be it retirement or the right opportunity.

What is a business valuation?

First things first, Wikipedia defines a business valuation as “a process and a set of procedures used to estimate the economic value of an owner’s interest in a business.” There are various techniques for determining the value of a business. Each method can be said to be more accurate in valuing specific company types. These valuation methods include a thorough and objective evaluation of every aspect of such businesses.

Having said that, business valuation assessments often include the value of your company’s equipment, inventory, property, liquid assets, and anything else of economic significance. Other considerations include your management structure, predicted earnings, share price, revenue, and so on.

Different approaches to value a business

As the saying goes “There is more than one way to skin a cat.” The same applies to methods to value a business. Here are a few of the most commonly used business valuation methods:

The Revenue Multiple Valuation Method

In this method, the company’s annual revenue is multiplied by a predetermined figure that is used in valuing businesses within the same industry. This method is generally used to value a business for companies with a negative or limited profit margin.

The Profit Multiple Valuation Method

This method is a bit similar to the revenue multiple valuation method. The way this method to value a business differs from the former is that rather than using yearly revenue, the value of a company is calculated using annual profits. This method is more reliable than the revenue multiple valuation method since revenue growth doesn’t always translate into higher profits.

The Asset Valuation method

As the name suggests, this method to value a business simply measures the value of a company by focusing on the company’s assets and tangible resources.

The Return on Investment Based Valuation Method

An ROI-based business valuation approach determines the value of your company based on its earnings and the potential return on investment (ROI) that an investor could obtain for investing in your firm. From a practical perspective, the ROI approach is valid because a potential investor is mainly looking for the best returns on his investment.

The Capitalization of Earnings Valuation Method

This method to value a business calculates the company’s profitability in the future by using several factors such as the annual return on investment, cash flow, and expected value. This method is very effective in valuing stable businesses as it assumes figures will remain consistent.

The downsides …

Some may contest these methods for being simple and too generic to present a truly detailed picture of the business. This is so because some of the figures used are often approximated using industry-specific assumptions. However, accurate figures are necessary to reveal the true value of a business.

This is why it is important to employ a professional with the necessary qualifications to conduct a proper valuation. The valuer should be recognized and accredited by relevant professional trade organizations like the Appraisal Foundation or the Institute of Business Appraisers.

Benefits of business valuation

A business valuation is a crucial part of every business that should be deployed by all business owners and managers. There is a myriad of reasons why business valuations are integral to a business. Some of them include; exit strategy planning, mergers and acquisitions, company sustainability, and many more. Below are five top benefits of valuing your business.

Visibility from more investors: Attention from investors is an integral part of your business growth. In order for investors to understand your business better, they will require you to provide a business report. A thorough value projection is what investors are looking for, as well as the current value. In addition to knowing where their money goes and how they will get a return on their investment, investors are more likely to seriously consider proposals if they can understand where their money is going.

Holistic understanding of the business position for strategy: Essentially, a valuation reveals the true value of a business. Business owners can look at how they can increase their overall value with an understanding of the factors that positively impact performance.

Greater negotiating power for Mergers & Acquisitions: If selling your business is part of your long- or short-term plan, then a thorough valuation is the first thing you will need to embark on this path. This will allow you to adequately present the value of your business in a bid to attract possible buyers. Factors such as your asset withholdings, company growth, and projections are what potential buyers are interested in learning. You can show a consistent trend of value growth by performing a business valuation annually. This way, you can use that trend to negotiate the purchase price.

Determine where your business fits in the industry: With a proper valuation, you can tell exactly what your business position is within your industry. A valuation will use existing public data points, such as previous price movements or the recent sale of similar companies or publicly traded. As a result, business owners will be able to have a better understanding of the progress that their business is making on a grander scale. In turn, they will be able to strategize ways to invest their finances most effectively to grow.

Conclusion

To conclude, it is quite evident that valuing a business is not a straightforward venture. Especially seeing as there are many different methods to determine a business value. Ultimately, no method can be said to be better than the other. In fact, a lot of times, more than one method will be used to determine the true value of a business. Therefore, it is advisable to hire a professional who will be able to do a thorough job for you.

 

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