As you prepare to sell your engineering company, one of the most important things to do is get an accurate business valuation. A valuation helps you know how much to sell your company and brings light to its strengths and weaknesses. However, you have to be thorough for the valuation report to be accurate. Every aspect of your company has to be looked at. That is why it is always best to work with a business broker for engineering companies Orange County.
A business broker is able to distinguish the value of a company from its price. Price is the specific value of a company at the time of sale. It varies depending on supply and demand in the market. The value of a company, on the other hand, is what potential buyers will give depending on their profile and interests. Value is basically a measure of how useful the business will be for the buyer.
There are many methods a business broker for engineering companies Orange County can use in a business valuation. The selected method will depend on the objective of the assessment. This post focuses on the Discounted Free Cash Flow method of business valuation.
The focus of this business valuation method is to determine the ability of a company to generate wealth. It estimates the amount of money the owner can take home during the company’s lifespan. The method converts future cash flows into today’s currency using a ‘discount rate’ in order to reflect future money’s value discounted to today’s value. The analyst will include the potential risk associated with the generation of wealth. The method basically looks at the future performances of a company and its ability to generate cash flow through the available resources.
With the Discounted Free Cash Flow method, the analyst will review the company’s historical data. This gives insight into the factors that led to the incurred costs and generated revenue. The analyst also looks at the factors that can affect future financial projections
Market analysis and competitive positioning analysis will also be considered. To anticipate an increase in demand, the effects of Porter’s five forces (threat of substitutes, barriers to entry, negotiation power of suppliers, rivalry among competitors and negotiation power of buyers) will help anticipate an increase in demand, understand the company’s vulnerability and measure the negotiation power of suppliers and clients. Moreover, the analysis of your competitive positioning in the market will either increase or decrease the final value.
Cash flows are estimated after doing these preliminary analyses. This is the estimated future cash that shareholders can take home without damaging the growth of the engineering company for a period of 4 to 5 years.
As you can see, estimating the value of a business can be very complicated. You need to enlist the help of a business broker for engineering companies in Orange County.