As a business owner, you might seek an appraisal of your business for a variety of reasons. Perhaps you need to assess the value of your business for tax purposes, or for an upcoming sale, or for a divorce proceeding — whatever your reason, business valuation involves determining the current worth of your company by using objective measures and evaluating all aspects of the business.
If you need to determine the economic value of your business, the business consultants at Boxelder Consulting boast deep expertise in financial modeling and forecasting, so you can rest assured that the information underlying our business valuation estimates is as accurate and reliable as possible.
What To Know About Business Valuation
The purpose of business valuation is simply to determine the economic value of a given business. In many cases, this valuation is conducted prior to a merger or acquisition. But, as we’ve mentioned, there are many other situations that may drive a company to conduct a valuation.
Business valuation is conducted by a financial professional with specialized skills in this area; CPAs and accountants may be qualified to provide valuation services, depending on their training.
To conduct a valuation, an assessor can use one of many valuation methods. No matter which method is selected, however, all valuation methods attempt to assess the economic value of a given company using objective markers or indicators. In other words, because the purpose of a valuation is to produce an accurate estimate of a company’s economic value, valuation methods base their assessment on concrete evidence.
The Methods of Business Valuation
As mentioned, you can use different methods to assess the economic value of a business. While several formal models will provide accurate assessments, it’s important to remember that estimating the fair value of a business is both an art and a science. Choosing the right valuation method and appropriate inputs is a subjective process.
Here are a few of the more commonly used business valuation methods:
Market Capitalization Method
Probably the most straightforward method of business valuation, the market capitalization method calculates a company’s economic value based on the current price of its outstanding shares of stock. As an example, if a company has a current stock price of $50 per share and a total of one million shares outstanding, then the company would have a current economic value of $50 million, according to the market capitalization method.
1 million shares * $50 / share = $50 million valuation
The times-revenue method examines a company’s economic value through its revenue streams. Also known as the “multiples of revenue method,” this method applies an arbitrary multiplier to the company’s revenue streams over a period of time (e.g., the previous fiscal year) to produce a range of values for the business. To determine the correct value of the multiplier, one must analyze a variety of factors including the macroeconomic environment, industry conditions, etc. Companies poised for high growth and expansion will earn higher multipliers, while slow-growing firms will likely have a multiplier below 1.
Liquidation Value Method
A company’s liquidation value is the net cash it would have if it sold off its assets and paid off its liabilities. If a company can generate $100 million from its assets, and has $95 million in liabilities, then the company has a value of $5 million, using the liquidation value method.
$100 million in assets – $95 million in liability = $5 million valuation
This is by no means an exhaustive list of the business valuation methods in use today. Other methods include replacement value, discounted cash flow, breakup value, and many more. Though they employ different approaches, these methods all attempt to tie the economic value of a company to hard, objective indicators.
If you think you may need a business valuation in the near future, give Boxelder Consulting a call today. Our experts can provide business valuation services tailored to your particular situation. We can take a look at your business, recommend the best valuation method, and produce the most accurate assessment of your company’s economic value.