When you need to determine the financial value of your company, the process is known as a business valuation. There are many different reasons why a business valuation may be required: you may have received an offer to purchase your business and be unsure as to whether it represents a fair number or not. You may be interested in putting the business up for sale or in taking on a partner. Knowing the value of your business is essential to ensuring that you are taxed fairly or that you are being treated fairly in the dissolution of a partnership or marriage. Whatever the reason, the evaluation process is complex and requires the expertise and knowledge of a skilled professional.
When preparing a business valuation, it is important to remember that there are a variety of approaches and assumptions that impact the end result. Where the business owner may believe that the company has generated so much goodwill or contributes so much to the community as to escalate the business value, an investor may look no further than the revenue that is being generated. Attitudes about risk can come into play, with a buyer who is more risk-averse discounting a business’s value more than one with higher risk tolerance. One potential investor may have a significantly different vision for the company’s future, and that can also color their view on the business’ worth.
Most business valuations are done using one of three different approaches. They are:
- Asset approach
- Market approach
- Income approach
The asset approach takes a careful look at the business’ assets and liabilities, taking into account certain variables. The market approach looks at the value of other markets serving the same space and industry to determine what a buyer is willing to pay. The income approach looks at the financial payoff that the business provides.
Whatever business valuation method is chosen, the process will begin with providing comprehensive financial statements, information about products and services, customer basis and competitors. With this information and an understanding of the business’ industry and other factors, the appraiser will determine which valuation approach is most appropriate for the particular situation, then collect any additional data that’s needed to prepare the final report.
If you need a business valuation conducted for your company, we can help. Contact us today to discuss the process and set up a consultation to address your situation further.
