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A company valuation, regardless the method you choose, is a process where the actual elements of the company are measured, as well as its competitive position within its sector and its future financial expectations.
When is an accurate business valuation useful?
There are many occasions when it it useful to have an accurate business valuation. Smart business owners regularly review their company valuation and use it to validate if they are improving their business.
Here are some examples of when you might need to rely on an accurate business valuation:
This very simple concept – thousands of years old – is one that definitely applies when it comes to valuing a company. Valuations are very personal, and are dependent on the who, what, why and when.
In an acquisition scenario, you should consider the following:
Is the buyer a competitor, private equity firm, or perhaps a high net worth individual?
Is it a minority or controlling stake being sold?
Will the buyer(s) have voting rights?
Are they looking to acquire IP/people/assets, or to protect market share? Is it a case of vertical integration (i.e. a company acquiring its supplier(s)?
Is it a potential-filled start-up, a growing business or an established, mature company?
The above elements will steer a valuation up or down from a baseline range – a range which will have been calculated using one or more of three standard methodologies.
This is the most complex method, and most useful for companies who are a little more mature. It requires preparation of a long term forecast (circa 10-20 years), focussing on cash a business could earn over that period, discounted. The acquirer will likely build their own financial model, using the target’s historic financial data and future businesses assumptions as a base, with their own twist added.
This is useful for companies in early stages of their life, where there will be limited trading history, limited assets and a great variation in what could happen next. Normally EBIT or EBITDA will be adjusted for exceptional items, and then have an industry standard multiplier applied.
If there have been sales of similar companies in the recent past, these can be used to give an indication of the right price.
For larger more mature companies, comparable companies maybe found listed on stock exchanges.
The cost approaches aim to value a business based purely on the assets it owns/controls. For tangible assets, this can be either what it would cost to replace the assets (i.e. market value) or what was originally paid for the assets. Complexity arrises from intangible assets (i.e. brands, goodwill, licences, concessions, customer lists etc…) as these assets have subjective value.
In order to get the most accurate business valuation it is important to know why you are going through the valuing processing, and what are you trying to accomplish with it.
An accurate company valuation can enable a company owner to improve their business, bringing four primary benefits:
Although many business owners have a vague idea of what their companies are worth, most are guessing over time this guess work can prove costly. That said, it is extremely difficult for a business owner to create an objective business valuation of their own business. To ensure an accurate and objective valuation it is always best to use the services of a professional.
Business valuation relies on the professional judgment of an analyst who will weigh up the nature of the business, its financial performance, local and national economic conditions, values of assets and related liabilities – plus any unique knowhow – before eventually arriving at an estimate of the value of the business.
Not knowing fair market value could cause owners to sell their businesses for less than they actually are worth – or for heirs to pay more than their fair share of taxes after the owner’s death. For these reasons, the cost of a business valuation can be an excellent investment.
Understanding what you need the valuation for will help to shape your approach to the process – and improve your business’ prospects as a result.
Your company value will change to a certain extent depending on who is looking to invest in, or acquire, your business.
Certain valuation models are great for young companies, while others are better suited to established companies. Pick the one that most closely dovetails with your business.
A outside professional will bring a detachment and objectivity to the valuation process that you – being at the coalface – are unlikely to have.
How to ensure you’re getting the right valuation for your business – and why it matters.
When starting a business there are a few concepts which, if you can get your head around them early on, will save you a huge amount pain and difficulty later on.