Income Artist

What Is Business Valuation?

Author: Jimmy Barron
Published:December 8, 2022
3 mins 47 secs

A business valuation is a method to determine how much a business is worth. Determining the value of your business can be vital in various contexts, such as selling your business, establishing partner ownership, tax purposes, or divorce proceedings. 

A business valuation is also known as a company valuation, where all the areas of a business are analyzed to determine its work and the worth of its units and departments. You can learn more here about such practices, but let’s discuss it a bit!

Methods Of Calculating A Business Valuation

While there are various ways to determine your business’s value, each of them has its limitations. However, some of the most common methods of calculating a business valuation include the following:

Discounted Cash Flow (DCF)

The discounted cash flow method depends on projections of future cash flow, which are adapted to the current market value of your business. Basically, the method involves looking at how well your business can generate future returns for prospective investors. 

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Comparable Company Analysis

This method looks at businesses of similar sizes in similar industries and compares various metrics, such as revenue, taxes, depreciation, earnings before interest, and amortization. As such, the comparison will help you determine how much your business is worth compared to its peers.

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A comparable company analysis can be considered to determine how much similar companies were recently sold to establish your company’s value. This comparison is a robust method of valuation for mergers and acquisitions. 

Market Capitalization

A business’ market capitalization is determined by multiplying the total number of shares by the current share price. However, this method can only be done for publicly traded companies, but it essentially finds how much your company is worth based on shareholder equity. 

Determining Assets and Liabilities

Your company’s revenue streams, liabilities, and assets must be properly assessed when you want to sell it. Your tangible and intangible assets calculate the SDE multiplier (Seller’s Discretionary Earnings), but the intangible ones have a greater bearing.

To determine the true worth of your business, you need to consider all of your assets and then decrease liabilities. Here is what you should know about assets and liabilities:

Tangible Assets

You are probably familiar with tangible assets because they are straightforward and include everything your company owns, from machinery, real estate, and equipment, to inventory. It is easy to calculate their worth.

Intangible Assets & Liabilities

When it comes to Intangible assets, things are trickier, but this is where a lot of value resides. Copyrights, trademarks, reputations, and patents, all these things fall into the intangible assets category.

You must be very careful here because intangible assets might become liabilities if you can’t transfer ownership. Liabilities refer to outstanding obligations or debt. Any business seller should eliminate their company’s obligations and debt to receive the best deals.

Working With A Business Broker

Business brokers are professionals that can help you get some of the best deals on the business market or properly audit your company and sell it for the right price.

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How Does Business Valuation Work?

Business valuation is typically carried out when a business wants to sell all or a portion of its operations or is looking to merge with or acquire another company. The valuation can include an analysis of the business management, capital structure, future earnings prospects, or asset market value. 

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A company valuation is a business’s estimated value at a specific time. However, your company’s value can vary at different points in time due to external and internal factors. Since a business valuation depends on a specific point in time, the valuation does not expire, yet, the determined value might no longer be appropriate the older the valuation report gets.

Additionally, business valuation is pertinent for tax reporting. That means the Internal Revenue Service (IRS) requests that a company be valued according to its fair market value. So, various tax-related events, including the sale, purchase, or gifting of shares of a business, will be taxed based on valuation.

What is a Business Valuation Company?

Business valuations are fundamental when negotiating for your business’s purchase, sale, or merger. Some companies provide valuation services, offering valuations of tangible and intangible assets or helping you during mergers & acquisitions or dispute resolutions.

However, the process of valuing a business is complex, and there are no shortcuts, so you might need some expert guidance. Consider hiring a professional to value your business properly and to avoid making a huge mistake! It may be worth more than you might expect.