A business valuation is a process of determining the economic value of a business or company. A business broker Mount Lagunaor an appraiser will perform a business valuation to determine the fair value of the business. This is done for several reasons including determining the sale value, taxation, establishing partnership ownership and in divorce or estate division proceedings. But what exactly is involved in a valuation?
Basics of a Business Valuation
Business valuation is mainly conducted when a business is looking to sell all or part of its operations. It may also be considered when a business is considering a merger or acquisition with another company. valuation is the process that helps determine the current value of a business. Several objective measures are used and various aspects of the business are evaluated. It is because of all the work that has to be done that you need to enlist the help of a professional business broker Mount Laguna.
Business valuations may include the analysis of the business’ management, its future earnings prospects, capital structure and its assets’ market value. The tools and methods used in a business valuation will vary from one evaluator, business and industry to the other. The most common approaches in a business valuation include reviewing the financial statements, discounting cash flow models as well as comparing the value of similar businesses.
Business valuation can also be performed for the purposes of tax reporting. The IRS (Internal Revenue Service) requires that businesses be valued based on their fair market value. Some tax-related events like purchase, sale or gifting of a business’ shares will be taxed based on the valuation.
Methods of Valuation
There are several ways in which a business can be valued. The most common methods include the following:
- Market capitalization: With this method, the value of a business is calculated by multiplying the business’ share price by the total number of shares outstanding.
- Times revenue method: A stream of revenues that are generated over a specific period of time is applied to the multiplier which depends on the economic environment and industry.
- Earnings multiplier: This method is more accurate than the times revenue method. The method adjusts future profits against cash flow which could be invested at the current interest rate over a specified period.
- Discounted cash flow method: The method is based on the projections of future cash flows which are then adjusted to get current market value of the business. The key difference between discounted cash flow method and the profit multiplier method is that this method accounts for inflation.
- Book value: This is the total value of the shareholder’s equity as seen on the balance sheet.
- Liquidation value: This is the value of the net cash which a business receives if all its assets were to be liquidated and the liabilities paid off.
As you can see, a lot goes into a business valuation. That is why you should leave this work to a business broker Mount Laguna. He is better equipped to perform a thorough assessment and provide an objective report.