What Is a Business Valuation?
A business valuation is a general process of determining the economic value of a whole business or company unit. Business valuation can be used to determine the fair value of a business for a variety of reasons, including sale value, establishing partner ownership, taxation, and even divorce proceedings. Owners will often turn to professional business evaluators for an objective estimate of the value of the business.
- Business valuation determines the economic value of a business or business unit.
- Business valuation can be used to determine the fair value of a business for a variety of reasons, including sale value, establishing partner ownership, taxation, and even divorce proceedings.
- Several methods of valuing a business exist, such as looking at its market cap, earnings multipliers, or book value, among others.
Methods of Valuation
There are numerous ways a company can be valued. You'll learn about several of these methods below.
1. Market Capitalization
Market capitalization is the simplest method of business valuation. It is calculated by multiplying the company’s share price by its total number of shares outstanding. For example, as of January 3, 2018, Microsoft Inc. traded at $86.35.1 With a total number of shares outstanding of 7.715 billion, the company could then be valued at $86.35 x 7.715 billion = $666.19 billion.
2. Times Revenue Method
Under the times revenue business valuation method, a stream of revenues generated over a certain period of time is applied to a multiplier which depends on the industry and economic environment. For example, a tech company may be valued at 3x revenue, while a service firm may be valued at 0.5x revenue.
3. Earnings Multiplier
Instead of the times revenue method, the earnings multiplier may be used to get a more accurate picture of the real value of a company, since a company’s profits are a more reliable indicator of its financial success than sales revenue is. The earnings multiplier adjusts future profits against cash flow that could be invested at the current interest rate over the same period of time. In other words, it adjusts the current P/E ratio to account for current interest rates.
4. Discounted Cash Flow (DCF) Method
The DCF method of business valuation is similar to the earnings multiplier. This method is based on projections of future cash flows, which are adjusted to get the current market value of the company. The main difference between the discounted cash flow method and the profit multiplier method is that it takes inflation into consideration to calculate the present value.
5. Book Value
This is the value of shareholders’ equity of a business as shown on the balance sheet statement. The book value is derived by subtracting the total liabilities of a company from its total assets.
6. Liquidation Value
Liquidation value is the net cash that a business will receive if its assets were liquidated and liabilities were paid off today.
This is by no means an exhaustive list of the business valuation methods in use today. Other methods include replacement value, breakup value, asset-based valuation and still many more.
What is a Certified Business Valuation?
Certified business valuations are commonly referred to as business appraisals that are performed by certified valuators who adhere to published valuation standards set forth by well-known, accredited organizations. A business valuation report issued by a firm with certified valuators holds credibility. Our valuation experts are certified by the National Association of Certified Valuators and Analysts (NACVA) – the most recognized and esteemed organization in the valuation industry.
When Do You Need a Certified Business Valuation?
Whether you are a business owner contemplating the sale of your business, raising bank capital or investor equity, pursuing a legal claim, preparing your succession or planning any array of accounting and IRS-related reporting events – you will want to obtain a valuation report that is credible and protects you against others from discrediting the valuation.
If you are facing any of these life events or at risk of possible IRS-related penalties or losing more than $5,900 on your transaction, then we highly recommend the insight provided by a certified business valuation.
Your certified business valuation will:
- Inform the list price and provide the fair market value of your business if you’re selling
- Deliver the credible and reliable value of your business if buying out a shareholder
- Provide the value of your shares, as reported to the IRS, if gifting to a family or friend
- Add valuable credibility during negotiations or legal proceedings
In some instances, you may choose to provide the certified valuation report to your counterparty to further strengthen the reliability of the valuation and remove barriers. In other cases, you may be required to disclose the valuation report as required by the IRS when gifting shares or purchasing a business.
We offer three different types of valuations
We have an affiliation with BizWorth which enables us to offer certified valuations in addition to our Brokers Opinion of Value. Certified valuations and Informational Valuation reports are done by an experienced, NACVA certified valuator.
Brokers Opinion of
Value
A Brokers Opinion of Value is a type of business valuation done for the purpose of discovering the price a potential buyer may be willing to pay for a business. This estimate is based on comparable sales data for similar size companies in the same business or industry. Typically, if a client is not ready to list their business for sale, they will use this report to continue to build the value of their company for a future exit.
Informational Valuation Reports
Informational Valuation Reports are less time-intensive to produce and more affordable. They provide valuable insight to establish a market price, support exit planning or inform internal business planning decisions. Although this is not a Certified Valuation, the work is done by a NACVA Certified Analyst.
Certified Valuation Reports
Certified valuation reports are invaluable for supporting business acquisitions, divestitures,
estate planning, partner disputes, marital dissolutions and bank loan applications - when the valuation must be credible and stand up to scrutiny. All reports are prepared and signed by a NACVA Certified Valuation Analyst (CVA).
Quality of Earnings Report
The Quality of Earnings (QoE) report provides a more affordable and value-added way to estimate the future performance of a business to support the due diligence phase of an acquisition. The QoE report includes a careful analysis of historical revenues and expenses, sales and major customer concentrations and expense add-backs. All reports are prepared by an in-house team of NACVA-certified Master Analysts in Financial Forensics (MAFF).