For business owners, a true business valuation is crucial for making informed decisions about growth, investment and even potential exit strategies. The valuation of businesses is the process of determining the economic worth of a business, providing owners with a comprehensive understanding of their company’s financial standing.
In this blog, we’ll explore why a business owner would want to value their business, how to valuate a business and how to get a business valuation from a credible source.
Four common reasons to request a business valuation
As no two businesses run the same, the reasons why a business may seek out a business valuation can differ. We’ve listed some common reasons for business valuations below:
- Selling a business — One of the primary reasons a business owner may seek a business valuation is when they consider selling their business. Knowing the accurate value of the company allows the owner to set a realistic asking price, which is essential for attracting potential buyers and ensuring a successful sale.
- Merger or acquisition — In the case of a merger or acquisition, understanding the value of both companies involved is crucial for negotiating fair terms. A business valuation helps determine the share exchange ratio and ensures a balanced agreement.
- To obtain financing — Whether seeking a loan or bringing in new investors, a comprehensive business valuation provides credibility to the business’s financial health and prospects. Lenders and investors need assurance that their funds are being invested in a prosperous asset.
- Internal decision making — Business valuation is not only useful for external purposes but also for internal decision-making. Understanding the company’s worth allows owners to make strategic decisions, such as expanding operations, diversifying product lines, cash flow management or improving existing processes.
How do business valuations work? The three key methods of valuation.
The business valuation method used may vary depending on the industry, company size, purpose of the valuation and available financial data. Here are the three most common ways to valuate a business:
- Asset-based valuation — This method calculates the business’s value based on its tangible and intangible assets. Tangible assets include equipment, property and inventory, while intangible assets encompass intellectual property, goodwill and brand value. The total value of these assets, minus liabilities, provides the company’s net asset value.
- Market-based valuation — This method involves comparing the business to similar companies in the market that have been recently sold or are publicly traded. This method relies on market multiples, such as the price-to-earnings (P/E) ratio, to estimate the value of the business.
- Income-based valuation — This approach focuses on the company’s earning potential. The two main methods within this category are the capitalisation of earnings method, which divides the expected earnings by the capitalisation rate and the discounted cash flow (DCF) method, which calculates the present value of future cash flows.
How much does a business valuation cost? There is no easy answer to this, as the cost of a business valuation can vary as it significantly depends on several factors. It’s also worth noting that there is no fixed price for a valuation. Generally, business valuations are a customised service tailored to a business’s individual needs.
So, who does business valuations? While many options are available, if you’re looking for unmatched industry expertise, why not work with the professionals at CFO On Call?
CFO On Call — your trusted consultant for accurate business valuations
CFO On Call is a leading financial consulting firm specialising in assisting businesses with various financial aspects, including business valuation and exit strategy planning. We work with highly skilled valuation analysts with extensive experience assessing businesses across various industries.
Accurate business valuation is a complex process that requires careful planning. Let us simplify the process. Speak to the experts at CFO On Call today to get started.
