Business Valuation Methods

There are many reasons you may need to know the value of your business -- if you are considering buying a business, a merger or outright sale, for tax or loan purposes, or for estate planning. Whatever the reason for needing to know this information, trying to come up with a valid figure can be a major effort and challenge.

 

Pricing a business too high can result in the business not being sold for a long period of time; sometimes not at all.  If the business owner eventually adjusts the price to how the market is responding, the deal will often be tainted with the view that something is wrong with the business or that the owner is desperate, possibly resulting in an even lower business appraisal than it would have originally been valued at. 

 

For instance, if, due to unknown reasons, a business owner thinks his company valuation is $1.7 million and the company valuation is really $1 million, this could be very detrimental.  Any offers that come in around the $1 million mark might be seen as low-balling and be quickly rejected by the owner.  This could cause word to get around that the business owner is asking too high of a price, causing the offers to stop coming in.  Once this happens, the business is soon seen as damaged goods, as it has been on the market too long and no longer has any offers available.  To decrease the price would be wise, but the perception of the business being damaged goods would inevitably be present.

 

Pricing a business too low can often result in the business owner not realizing the full benefit of their investment, ultimately losing out on the full company valuation.

For instance, if it is misunderstood how certain factors affect valuing a business and your company valuation is $1 million, but it is actually $1.7 million, you will in essence lose $0.7 million in the sale.  This is very problematic, because you are not realizing the true value of your business and in the end lose an extreme amount of your potential profits.

Due to the above reasons, it is very important to take the time to get an accurate business value.  Our tools and templates are designed to provide you with a business valuation that you can then base your potential sale price on.  By getting a company valuation through a well thought out defensible method, you reduce, and potentially erase the risk of pricing a business too high or too low.

 

A realistic business valuation requires more than merely looking at last year's financial statement. A valuation requires a thorough analysis of several years of the business operation and an opinion about the future outlook of the industry, the economy and how the subject company will compete.

 

There are many hard-to-measure intangibles that are a factor in the value of a business. It is not simply a process of adding up the numbers from a variety of reports. Business valuation has been called an art, rather than a science. Estimates of a business' value by various experts can vary as much as 30 percent.

 

Business valuation methods fall into the following categories, depending on what their major focus is:

• business assets, including book value and liquidation value methods
• historical earnings, including debt-paying ability, capitalization of earnings or cash flow, gross income multipliers, and dividend-paying ability methods
• a combination of assets and earnings, namely, the excess earnings method
• the market for similar businesses, including comparable sales, industry rule of thumb, and p/e ratio methods
• future earnings, namely, discounted future cash flow or earnings methods
• Leveraged buyout (LBO) with varying types of debt and equity instruments

The method that is right for your business will depend a lot on the type of business you own and the standard for determining values in your industry. The various methods are explained and shown in far greater detail in the guides, tools, and templates below.

 

Mergers, Acquisitions, and Divestitures (Buying & Selling Businesses)
Joint Ventures and Strategic Alliances (Partnering)
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Guides Business Valuation Methods How To Prepare A Business For Sale Questions Before Buying a Business Doing a Fairness Opinion Learning Balance Sheet & Ratios Learning Income Statement & Ratios Learning the Cash Flow Statement MARKET, INDUSTRY, AND COMPANY, RESEARCH

Tools and Templates Quantifying and Valuing Synergies Company Valuation Model - Ver1 Company Valuation Model - Ver2 Valuation Model - Comparables Method LBO Valuation Model - Ver1 LBO Valuation Model - Ver2 Financial Ratio Analysis Dividend Growth Models (No Preview) Early Stage Valuation (No Preview) Valuation Risk Analysis Cash Flow Model Financial Statements Projection Model

 

Additional Valuation Tools For Annual Subscription Members Only

Business Valuation Books and Courses

Valuation and Analysis Using Financial Statements

Corporate Finance Methods

Presentation and Report Charts and Graphics - Big Time Saver!

New Business, Product, and Startup Ideas

 

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