Business valuation is the process of determining the economic value of a business.Before a business can be valued, you need to fully understand what it is worth and why it's worth it.You can analyze the market if you understand what and why.You can use one or more valuation methods to determine the value of the business using the information you have compiled.
Step 1: Determine the purpose of the valuation.
Each purpose requires a different valuation process and result when people request business valuations.There are many reasons why a person might want to buy or sell a business, including gift and estate tax purposes.Statutes can be used to set out the valuation process for a divorce.If you want to buy or sell a business, it may not be worth using these statutes for the purpose of valuation.One party to the divorce may want a higher valuation in order to get a fair share.If you are selling a business to a family member, you might not be concerned with getting the greatest value possible.Your value will be based on the minimum tax requirements.
Step 2: What is being valued should be described.
Before a business can be properly valued, you need to know what's at stake.The entire business needs to be valued if it's being sold.Some pieces of real property will need to be valued if only a few of them are sold.The value of the stock will need to be determined if you are going to give stock options to certain employees.
Step 3: The proper valuation method should be chosen.
Scan through the possible valuation methods to understand what type of information you need to gather moving forward after determining why and what you are valuing.Having an idea of what you want to do will help you prepare for the process, while you don't need to choose your method immediately.If you are using a market-based method, you will need to gather information about comparable businesses in your area.If you are using income-based methods, you will need to look at your past and present financials in order to determine your future income.If you are using an asset-based method, you will need to gather information about the assets and liabilities of the business.
Step 4: Hire someone to help.
If you are unsure how to navigate the business valuation process, or if you want professional help to get you the best valuation possible, you can hire valuation consultants, appraisers, business brokers and lawyers.They will help you gather and analyze data, make strategic decisions that can influence value, and actually valuate the business.The consultants will go through the process with you.They can help you determine what and why, pick an appraiser, interact with them, gather documents, and analyze them.The business will beValuated by the Appraisers.Business brokers can help you sell your business.Reputable brokers can help you sell your business quickly and for a fair price.Lawyers can help you with legal requirements.If you value your business for estate tax purposes, a lawyer will be able to assess possible tax liabilities based on different valuations.
Step 5: A list of things to do.
The appraisal you are working with will ask for a number of documents to help them figure out the business.As documents are being requested, keep a list of them and check them off.Due to the shear number of documents needed to create an accurate valuation, your list may stretch.
Step 6: Financial statements to be compiled.
Balance sheets, income statements, tax returns, and interests the business has in other companies are some of the financial information needed.All of the documents should show the past five years.Prepare to give accounts payable/receivable, inventory lists, existing contracts, stockholder lists and compensation schedules.If you are going to use an income-based method of valuation, all of these documents will be helpful.
Step 7: Receive corporate documents.
Corporate documents can be used to understand how the business is structured.This type of information can be used to compare your industry to others.For example, if your business is a C corporation with 10,000 shares of stock available publicly, an appraisal will look for other C corporations with similar attributes.Rights of first refusal, existing buy/sell agreements, options to purchase stock, and corporate minutes will be included in corporate documents.
Step 8: Useful guides can be created.
Creating documents to help others in the valuation process is something you might consider.For example, you could draft a short history of your business, including if you've had any offers to buy in the past, what makes it unique, and where you stand in relation to other businesses in your industry.A list of competitors could include their size and location.If you have any intellectual property, make a list of it.
Step 9: Allow for a business visit.
Some people might like to visit your business in person.You should allow this to happen as long as possible.People will walk around and observe the operation when they visit a business.They will conduct interviews with a wide range of people.
Step 10: How much money can the business make?
There are many factors that affect the value of your business.You can try to increase your business's value by emphasizing or de-emphasizing certain factors if you understand them.The number one factor that affects the value of your business is how much money you can make.Your business's value will increase if you have more earning potential.Income-based valuation methods can be used to inflate the valuation of a highly profitable business with a large future earning potential.
Step 11: The availability of assets is determined.
Your business's asset availability is the second most important factor.The higher your value, the more assets you have.If your ratio of assets to liabilities is high, this is true.If an asset-based valuation method is used and you have a lot of assets and very few liabilities, your business's value is going to be high.
Step 12: There are intangible assets.
It's not possible to liquidate and sell factors that add to the value of a business.These intangible assets can add value to your business.goodwill, intellectual property, brand recognition, and an assembled workforce are intangible assets.Many companies might not have been as successful if it weren't for their brand name or logo.Consider the value of a brand of soda.The value of Coca-Cola is going to increase because it is a well-known brand.The book value of a business does not include intangible assets.Book value, which is the dollar amount of a business's net assets held on its balance sheet, only includes directly measurable assets.Market value is a separate assessment of business value that takes into account intangible assets, earnings potential and other aspects of the market.It's the total value of outstanding stock shares for a publicly traded company.
Step 13: Consider the history of the business.
The value of your business will increase or decrease based on a number of factors.If your business is located in Los Angeles, California, it will be worth more than if it is in Cedar Rapids, Iowa.If you have little competition, your business will be valued higher.Assume you own a dental practice.All of your dental equipment will be worth more if it is new.
Step 14: Determine the industry outlook.
The value of your business is linked to economic and industry conditions.If the economy is doing well and buyers are interested in buying businesses, the value of your business will go up.The value of your business will go down when interest rates go up.Some industries will rise and fall with the times.The value of weapons manufacturers goes up when there is a high threat of terrorism.
Step 15: Market-based methods can be used.
When the time comes, a qualified appraiser will work to valuate your business by synthesizing all of the information you provided.A market-based method will allow the appraiser to find multiple sources of comparable information and make adjustments to create a valuation.An appraiser can use public and private sources to research and collect business transaction data.They will look at the similarities and differences between your business and the others.This method won't work with every business.Small, closely held companies can't use market-based valuation methods because it's hard to find true comparables.
Step 16: You can choose an income-based method.
An income based method will calculate the probable future income of your business and use that income to create a value.In order to create a normalized income stream, the appraiser will adjust your revenues and expenses.They will come up with a value for your business based on the normalized income stream.Highly profitable businesses with high potential future earnings will benefit from this method.
Step 17: An asset-based method can be used.
Every asset and liability on your balance sheet will be adjusted by an asset-based method to create a fair market value.Your business's valuation is equal to those fair market values.This method ignores earnings and should not be used to value businesses that make money.Businesses that manage income producing assets should use this method.
Step 18: Combine more than one method.
Multiple methods can be combined to create hybrid valuations.Multiple aspects of your business can be taken into account in order to create the most accurate valuation.The "excess earnings" method is one of the most popular hybrid methods.Earnings over the norm will be calculated and capitalized using this method.The value is added to the fair market value of your assets to determine an overall value.