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Why do I need a business valuation? |
 Sooner or later, as a business owner, you will be faced with a situation that requires a business valuation. No matter what industry or profession you are in, there are many reasons to consider a valuation. Maybe you want to sell your business, or buy another. Perhaps you are estate planning or getting a divorce.
Below are a few additional reasons:
- You use gifts as a tax strategy in your estate plan
- You are liquidating your business
- You are setting up a buy/sell agreement
- You are seeking business financing
- You are doing strategic planning
- You are converting your C Corporation to an S Corporation
Whatever the reason, our team offers a solution. Synergy provides services that will meet your unique needs whether financial, legal or personal.
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What is the valuation process and what valuation methods do you use? |
Basic steps in a valuation process include:
Define value: Clearly defining the value (book, fair market, fair, enterprise, equity, minority, liquidation, intrinsic, controlling, non-controlling, marketable, investment, private company) you are seeking is critical. The type of value depends very much on the purpose of the valuation.
Gather data: The next step is gathering historical and projected financial, operational and economic information on the business.
Determine value: The valuator determines which valuation method or methods will provide the most accurate value for the company as a whole, based on the specific situation. By analyzing all the data gathered about the business, the valuator may look at the value established for similar businesses as well as the economic climate for the industry and the region within which the company operates.
Adjust value: The valuator must consider attributes that affect the value of the specific shares. Attributes include marketability, attached voting rights and whether they represent controlling interest in the company. In addition the valuator adjusts the financial statements to more accurately reflect the company's actual financial performance.
Valuation methods: These include the income approach, the market approach, and the asset-based approach.
The income approach capitalizes the company's expected income or cash flow stream by determining the rate of return on investment required by a potential investor, and it sets the value at the amount appropriate to generate that rate of return. This method is often used in conjunction with a discounted cash flow analysis to estimate the present value of the future stream of net cash flows. The valuation will forecast net cash flows or earnings for an appropriate time period and then convert them to present value using a discount rate or capitalization rate that reflects the company's risks.
The market approach gathers data from acquisitions of similar businesses or from the stock prices of comparable publicly-traded companies. The valuator adjusts the data to account for differences between the company and comparable firms. An adequate number of comparable companies is necessary to produce credible results. A valuator makes adjustments for comparability to the company. Important factors include the choice of comparable companies and the adjustment value of subject companies based on location, size, structure, growth, market, diversification, financing and other factors.
The asset-based approach requires establishing the value of all assets and liabilities. This method is often used when a business's earnings and cash flow don't materially contribute to its value. The identification and valuation of intangible assets is the most challenging aspect of this method.
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What factors will affect the value of my business? |
When buying or selling a business, focusing on the cash flow and financial statements is important. However, there are many other factors that impact the value of your business including economic trends, industry factors, competition, regulations, market position, internal controls and intangibles.
Economic trends: Economic conditions, especially costs of materials and availability of capital, affect a company's profitability. Businesses that depend on goods that are sensitive to demand are more vulnerable to economic trends than businesses whose primary goods are staples or commodities.
Industry factors: Industry outlook impacts value. Markets, channels of distribution and technological change affect a company's profitability and subsequent value.
Competition: When evaluating a company’s competition, it is important to review the industry concentration, nature of competitors and the ease of entry into a market.
Regulations: Compliance requirements and restrictions to market entry are important.
Market position: Reputation, pricing policies and customer base are tied to a company's ability to generate revenue and, therefore, impact value.
Internal controls: Operating and accounting controls affect risk. If these controls are weak, financial data could also be weak.
Intangibles: Intangibles greatly impact a company's value. Assets like an established name and reputation, a large customer base and a skilled workforce are just a few intangibles that need to be considered.
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