Business Valuation Overview

Whats my Business Value?
If you own a business, or a partial interest in a business, you will at some time need professional valuation services to determine how much the business assets (tangible and intangible) are worth, in order to:A business valuation establishes a value for an entire or partial interest in a closely held business, the valuator takes into account both qualitative and quantitative, tangible and intangible factors associated with the specific business being valued.

Use of a Business Valuation
The value of the business is typically considered equal to the future benefits that will be received from the business, discounted to the present at an appropriate discount rate.  We provide independent business valuations for  closely-held businesses, private equity firms, publicly traded companies, and partnerships. These valuations are used primarily for:

Business Valuation: The Approach

Business Valuation Approach: How will my Company’s value be measured? 
In determining the value of any Business or Company there are many different ways to “measure” value. These three approaches are the most commonly utilized, but may not always be utilized depending on specifics. The basic ideas behind each method follow: 



Interested in these approaches? Further explanation..

Income Approach - The income approach is based upon the economic principle of “anticipation” (sometimes called the principle of “expectation”). In this approach, the approximate indication of value of the subject investment (i.e., the subject business interest) is the present value of the economic income expected to be generated by the investment. As the name of this economic principle implies, the investor “anticipates” the “expected” economic income to be earned from the investment. This expectation of prospective economic income is converted to a present worth – that is, the approximate indicated value of the subject business interest.

There are numerous methods that make up the income approach, including capitalization of earnings, and capitalization of excess earnings. The income approach also includes discounted future earnings and discounted free cash flow.

Asset (Cost) Approach - The cost approach (or asset-based approach) is based on the economic principle of substitution. When properly applied, cost approach methods are some of the more complex and rigorous valuation analyses. Tangible assets can be easily appraised and their actual balance sheet values adjusted to reflect the results accordingly. However, it can be difficult to individually quantify the fair value of intangible assets such as the name, reputation, trained workforce, trademarks, and other intangible assets.

Market Approach - The market approach is based on the economic principle of efficient markets. The market approach estimates a value by comparing the subject business interest to comparative business interest that have been sold in an established market place. 

There are numerous methods within the market approach, including the identification and analysis of comparable publicly-traded companies whose securities sell on a free and open market, definitive and verifiable transaction data available on actual sales of similar privately held concerns, actual or potential markets for a security such as buy/sell or shareholder agreements, and past transactions in the shares of the Company itself.

**Remember.. 
There is no "one size fits all", all companies, public or private will be different; therefore, the applicable methods utilized for one valuation may be different from another. Economic factors, discounts, industries, even simple things such as geographic locations can change the value of a business! 
Frequently Asked Questions:

Q: Business Valuations: What is a Business Valuation, and why should I consider one? 
A: A business valuation is a process of set procedures used to estimate the economic value of an individual’s interest in a business. Valuations are used by financial market participants to determine the value a hypothetical buyer/or seller would pay to acquire said business. In addition to estimating the selling price of a business, the same valuation tools are often used by business appraisers to resolve disputes related to estate and gift taxation, divorce litigation, allocate business purchase price among business assets, establish a formula for estimating the value of partners' ownership interest for buy-sell agreements, and many other business and legal purposes. Its best to have a valuation done when all parties are happily working together - this can significantly impact the cost of a valuation (vs. the real cost of a valuation when all parties involved need their own attorney during major disputes). 

Q: Factors affecting Business Valuations: What affects the value of my company?
A: The current and future forecasted economic conditions on a multitude of levels (local, national, industry, international, etc). The Financial Analysis including the common size, ratio analysis, industry trends & comparative analysis, and other comparables within your related marketplace. The normalization of financial statement analysis; is applied under the idea of allowing a hypothetical buyer to operate the subject business as an efficient company based on the current industry trend analysis and to the industry related companies operating similarly to their market comparisons. Discounts and Premiums may also be affecting your business. For example, How much control do you have? Do you hold the majority of the shares, or do your shares come with voting rights? Can you easily sell your shares on the stock market? Have you been in Business for a substantially long period of time? 

There are several approaches or methods, and depending on what kind of business you have, you will need a professional to determine which measurement is best (see our most utilized methods under 'Business Valuation Approaches' to the left on your computer, or above on your smartphone). 
Q: Why can't I just get a low cost or free Business Valuation? 
A: These 'low cost' or 'free' valuations often use approaches and methods including predetermined multipliers, and these are often the same across all industries, giving you more of an 'acceptable range' of values, rather than your specific value. These multipliers and predetermined ratios do not take into account your location, your customer history, your management team, and other special strategic advantages you may have built up over the years. The industry multiples are good if you're just curious, but if you want an accurate value for your unique business, specific to you and your Company, you should hire a valuation expert. 

    Have a question? Ask us! 

Think a Valuation is expensive? 

Consider the cost of selling or buying a business based on a false value. The cost of have a proper business valuation is nothing in comparison. Both the buyer & seller deserve to have piece of mind, as well as a fair value based upon the business in question. 

When was the last time you valued your Company? Do you know how profitable your Company is, or how profitable it could be? If you are thinking about selling your Business it is important to have a justifiable asking price for the current marketplace. Industry statistics indicate an overpriced business is the number one reason a business fails to sell. If you are considering buying a business it is important to review a valuation completed by a professional to ensure you are making the right decision. You wouldn't overpay for a new home would you? Valuations are often required when financing the acquisition through lenders. Business Valuations are also utilized during certain legal situations such as: divorce cases, estate planning, business partner disputes, and other unforeseen circumstances.