How to Conduct a Comprehensive Business Valuation

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Business valuation is all about assessing the economic value of a business organization. The valuation experts review and analyze all aspects of the business to arrive at a realistic view of its worth. They use different valuation methods depending on the intended use of the findings and the market sentiments.

Establishing the economic value of a business is the basis of making critical decisions, especially when selling or splitting the business. This article will highlight how to conduct a thorough business valuation.

Business Valuation Methods

There are many parameters for determining the value of a business. Each method has its pros and cons and presents a different view of how much the business is worth. That is why business owners should work with a certified valuation analyst to get a realistic figure regardless of the method used.

Market capitalization is the first method, which involves multiplying shares with the share price. This method ignores the cash at hand and the debt owed by the company. The times revenue method considers the streams of revenue collected over a certain time multiplied by a certain constant that varies depending on the industry.

The business valuation expert can also use the earnings multiplier method to know the business value. This method compares profit from the business against cash flow, which can be invested at the standard rate over the same period. The discounted cash flow method is another alternative to the earnings multiplier method, which accounts for inflation when estimating the current value.

The book value, which is the value on the balance sheets, is another method of assessing how much a business is worth. Some enterprises use liquidation value, which is the total value of all assets if they are sold at the market price.

Business Valuation Process

The business valuation process starts with the initial consultation between the shareholders and the valuation professionals. This is where they define the purpose of the practice and the appropriate valuation method.

After the meeting, the second step is reviewing and signing the engagement letter, which formalizes the engagement and outlines the terms, costs, reasons, and scope of work.

In the third step, the analyst or valuation professional collects historical financial data, year-to-date financials, forecasts and projections, legal documents regarding ownership and operations and contracts, intellectual properties and leases. This information forms the basis of further investigation or calculations to arrive at an accurate value.

The fourth step is where the business valuation professionals visit the business premises to tour the facility, meet the management, and gather insights into the business operations.

After calculating the value of the business, the valuation analysts draft a report and review it with a panel of competent professionals. They also take time to confirm the findings before delivering and presenting the business valuation report.

The Importance of Having a Business Valuation Report

Businesses can benefit from valuation services in many ways, which is why shareholders should work with reliable valuation analysts to avoid valuation mistakes. Business owners can use the findings when selling their business, negotiating for mergers, dividing property during divorce, solving tax matters, and establishing partnerships. They can also use the findings when securing a loan using the business as collateral to expand their venture into other areas or introduce other streams of income.

Business valuation involves calculating the dollar value of a company. It takes into account cash flow, liabilities, assets, earning potential, and other metrics to determine the economic value of the business. The valuation report can help business owners make sound financial decisions or negotiate when changing business ownership or structure.