6 July 2020
Business owners invest 80-90% of their total financial assets in their business. They know how to dedicate themselves to their work but not how to protect their investment.
2/3 of businesses fail in the first 10-15 years, but few owners have an exit strategy in place in case they need to sell. Business valuation methods provide an accurate picture of what your business is worth.
Read our guide to learn what business valuation entails and how you can do it using the proper strategy and software.
2/3 of owners want to get the full value of their business back once they sell, but you can't get a fair price if you don't know how much your business is worth.
Business valuation is the process of determining the value of a business and/or company unit. It turns every asset from employees to and more into a monetary figure.
It must consider a range of factors to provide accurate data, the first of which is the company itself. Measurements include performance, revenue, management, and other internal factors.
It's also important to consider the company's future. This involves factors like viability, market equity, and competitiveness.
Getting a business valuation provides several benefits to you as the owner and to everyone involved with the business.
Valuation data provides a clear picture of your assets and their true value. If you perform the process regularly, you can see how these numbers change over time.
Consistent data helps your business continue positive changes and put an end to outdated. It lets you reward and focus on the employees, equipment, and other assets that add the most value to your business.
One of the most common reasons to perform a business valuation is that it helps you negotiate with buyers, sellers, and investors. You can show them data to back up your claims about how much the business is worth, leading to a better final price.
Most business valuation methods can be categorized as either market, asset, income, ROI, or value-based. This refers to the core aspects of the business they focus on to gather their data.
The more a business resembles others in the same market, the easier it may become to perform a business valuation.
Market-based methods use comparison to determine the value of a business based on how much similar businesses sold for in the past. It's best when done often, as market conditions change almost every day.
An individual's assets include things like cars and homes. Business assets include tangible things like physical locations or equipment and intangible things like patents for intellectual property.
Asset-based business valuation methods compare the total value of a business's assets against its debt and liabilities to determine its value. The main types are asset accumulation and capitalized excess earnings.
Asset accumulation involves placing all of a business's assets and debts or liabilities onto a spreadsheet. The result is the total value of their assets.
Capitalized excess earnings considers the worth of all tangible assets, then adds in excess earnings from any intangible assets.
Income-based business valuation methods focus on how much the owners earn. They do so by finding the net operating income and dividing it by the capitalization rate.
This is one of the least comprehensive categories of business valuation methods. It only looks at how much cash is coming in and not how or why.
Investors want to know they've made a wise decision before putting their money and trust in someone else's hands, and business valuation can provide this peace of mind.
ROI-based business valuation methods examine the potential return on investment a business can provide. Past performance is the basis of these types of evaluations, as past cash flows indicate how well the business will do in the future.
There are several types of value a business can generate and different business valuation methods to determine them.
Enterprise value determines how much a company's assets are worth. It determines the total share value by multiplying shares outstanding by the current stock price.
Liquidation value determines how much a business's assets would be worth if they were liquidated to the bank. The final figure is usually smaller than other business valuation methods because the sales are cheap and fast.
Book value determines how much every shareholder would get if all of a company's assets, liabilities, and stock were sold at the amount listed in their records.
The cost approach is the most literal of all the business valuation methods. It ignores all cash flow and value creation factors and only focuses on how much it would cost to rebuild the business.
Corporate business valuation rarely uses the cost approach because it would be too difficult to generate for a large organization. It can be the perfect method for a small business that hopes to come back from financial hardship.
80% of business owners never ask for advice about how to make a transition. Consulting a professional can help you decide which of the many business valuation methods is best for you.
Corporate business valuation is a numbers game. It involves quantifying everything about a business, and all that data can be difficult to manage.
Document automation systems are one of the most useful types of business valuation software you can invest in. They make it easy to create, store, and access everything you need, from spreadsheets to typed notes. Learn more about what ours can do here.
Knowing about the different business valuation methods helps you choose the best one to provide the most accurate, useful data for your business.
Small businesses may only need the cost approach, but large corporations require a more comprehensive strategy. They can choose one based on market conditions, asset values, owner income, ROI, or other sources of value.
A business valuation formula generates plenty of documents and data that can be hard to manage on your own. That's why we've developed document automation methods that double as effective business valuation software.