5 Types of Business Valuations

Posted by transworldma on December 8th, 2021

Many small business owners begin to dream of retiring after operating the business for many years continuously. The decision to quit is likely to play on one’s mind as they age and begin to look forward to spending their time in a fulfilling way. There is nothing wrong with such a decision, though. One needs to think about planning for the future too. The prospect of selling the business can provide one with enough funds for planning the future in style. It becomes essential to contact a business advisor to ensure proper business valuations before informing the prospects about an impending sale. It is best to check out the associated facts before reaching out to investors who may be eager to take over the responsibility.

Business Valuation: What is it?

The procedure for determining the right financial value about a business entity either singly or as a part of a unit is known by the term valuation. Sure, the existing owner should ask for a fair price before handing over the control to another person/group. A professional evaluation will enable the business owner to quote a selling price based on facts. One may also have to consider getting an official valuation done to be established as the partner of the company for taxation purposes and before proceeding with divorce formalities and separation of assets.

Accepted Procedures of Business Valuation

There are multiple ways of evaluating a business. Some of the most popular methods include the following:

Market Capitalization- This is the easiest way of calculating the value of a business entity. The price of a single share of the company is multiplied by the number of shares that are outstanding. The seller is free to ask for the same price or sell it for a profit.

Times Revenue- The revenues generated by the said company over a specific period are considered along with the economic conditions of the moment and industry predictions. An IT company may be valued more than one working in the service sector.

Earnings Multiplier- It is based on the company\'s profits that is a measure of its success. The evaluator adjusts the future profits against the resent cash flow to obtain the figures.

Discounted Cash Flow (DCF)- This method is similar to the previous procedure discussed here. The multiplier factor also considers the future inflation, which is what makes it distinct from the Earnings Multiplier method.

Book Value- The business advisors asked to evaluate the business would ask to go through the company\'s balance sheets. The procedure used to find the actual value is pretty simple as the liabilities are subtracted from the total asset value to obtain a specific value.

The services of an M&A advisor are also needed for checking the facts and providing all details for corporate mergers contemplated for diversification of business, total acquisition, or obtaining tax benefits/deductions.