A business valuation is a process that will help you determine the economic value of your business or company. It is an ideal tool that allows entrepreneurs to evaluate their sales, determine partner ownership percentages, and assess your tax bracket.
The valuation helps define the business’ worth through objective standpoints and analyzes every aspect of your organization. It can include an assessment of your company's conduct, its financial structure, its revenue outlook, or the marketability of its resources.
A business valuation is also especially crucial when reporting taxes. The Internal Revenue Service (IRS) makes it a requirement for your business to determine its true market value because certain tax-related events like the selling, buying, or gifting of shares of a company will be taxed based on its valuation.
However, it isn’t a “one-size-fits-all” approach. The methods used for finding the value can range among businesses, industries, and sectors, all of which depend on specific types of data and your particular business needs.
With that established, what you would commonly see during a business valuation include:
A better understanding of your business and its potential.
More knowledge of the strengths of your business so you can plan accordingly.
To better protect your business and family.
To develop a succession plan.
To pay the proper amount when investing in a business.
To receive what your business is worth at sale.
To create purchase/sell agreements with potential business partners/colleagues.
To explore funding opportunities.
To establish a trust or implement an estate plan.
To prepare for taxing events like gifts or grants.
Market capitalization is the simplest model of business valuation and is computed by multiplying your business’ share price by its total number of shares.
With the times revenue business valuation approach, a flow of income made over a particular period is set to a multiplier that has to do with the industry, as well as its economic setting.
As opposed to the times revenue method, the profits multiplier method can be beneficial if you want a more concise idea of the true value of your company. That’s because proceeds are a more dependable marker of financial progress when compared to sales gross.
The earnings multiplier adjusts forthcoming profits against cash flow that can be used towards investing at the current interest rate over the same duration. Essentially, it modifies the current P/E ratio to check for existing interest rates.
The DCF method of business valuation is not so far off from the earnings multiplier. This approach considers forecasts of future monetary resources that are regulated to find the present market value of your business. The primary distinction between these two strategies is that it considers inflation when calculating the ongoing value.
The book value is the value of shareholders’ business equity as displayed on the balance sheet statement. The book value is acquired by taking away the total liabilities of your company from its total strengths.
Liquidation value is the net cash that a business will gain if its strong points were liquidated and liabilities were repaid today.
While these six methods are some of the most commonly used when determining business valuation, they are by no means the only strategies you can use. Other methods include replacement value, breakup value, and asset-based valuation, among others.
Get together with ActionCOACH RGV to review your options.
Get millionaire business tips from ActionCOACH and learn key things to improve your business along with other inspiring articles.