When determining to sell your business, it's crucial to understand what your business value is as you enter the M&A process.
FREMONT, CA: There are different ways to determine the value of a business and various reasons to conduct a business valuation.
Here is a thorough overview of the business valuation process, comprising common valuation means, when and why a valuation should happen, and things to consider following the outcome of a business valuation.
What is a Business Valuation?
A business valuation is an approach for determining a company's economic value. Professional evaluators are generally brought in to determine the value of the business, utilizing one or more valuation methods to turn up an objective number.
5 Common Business Valuation Means
Below are five of the most general business valuation methods:
1. Asset Valuation
Your company's assets incorporate tangible and intangible items. Use those assets' book or market value to determine your business's worth. Count all the cash, equipment, real estate, stocks, inventory, options, patents, trademarks, and customer relationships as you estimate the asset valuation for your business.
2. Historical Earnings Valuation
A business's gross income, capacity to repay debt and capitalization of cash flow or earnings determines its current value. For example, its value drops if your business struggles to bring in adequate income to pay bills. Conversely, repaying debt rapidly and maintaining a positive cash flow improves your business's value. Use these factors to determine your business's historical earnings valuation.
3. Relative Valuation
With the relative valuation procedure, you determine how much a similar business would bring if they were sold. Then, it compares the value of your business's assets to the value of the same assets and gives you a reasonable face value.
4. Future Maintainable Earnings Valuation
The profitability of your business in the future determines its value today, and you can use the future maintainable earnings valuation method for business valuation when profits are awaited to remain stable.
To calculate your business's future maintainable earnings valuation, evaluate its sales, expenses, profits, and gross earnings from the past three years. These figures support you predict the future and give your business value today.
5. Discount Cash Flow Valuation
Use the discount cash flow valuation method if profits are not awaited to remain stable. It takes your business's future net cash flows and discounts them to present-day values. With those figures, you know your business's discounted cash flow valuation and how much money your business assets are anticipated to make.
