A business valuation is an important process for any business owner, regardless of the size or type of their business. It’s particularly important if a business is planning a transition or change in structure, or an estate or succession plan is required.

A professional valuation can help a business owner determine if they’re making the most of their investments. By understanding what goes into a business valuation, as well as who should perform it and when it should be conducted, owners can make informed decisions about their business.

This article will provide an overview of business valuations and answer the following questions.

• What is a business valuation?
• What are the main business valuation methods?
• What is a 409A valuation?
• When and why should you conduct a business valuation?
• What are the steps of a business valuation?

What Factors Are Used in a Business Valuation?

Business valuations involve a complex process of assessing the worth of a company. Multiple factors are considered, such as:

• Size and condition
• Industry
• Location
• Economic climate
• Financial performance
• Intangible assets including intellectual property and brand recognition

Market conditions can also drastically alter an assessment of a business’s worth. It’s necessary to take all these into account to arrive at an accurate valuation that represents interests of both current owners and potential buyers.

Market Approach

This approach compares the business to similar guideline companies using valuation ratios based on those companies’ current market prices and historical or projected financial data. Those valuation ratios are then applied to the business’ adjusted historical or projected financial results.

This method is useful for businesses at various stages of their lifecycle.

Income Approach

Income-based valuations use projected cash flow or profitability of the business, cost structure, and more to determine value.

This technique works best for businesses that have a reliable profit stream from operations. Analysts consider current and potential revenue, expenses, capital expenditures, and changes in other assets and liabilities to determine a company’s future cash flow.

The expected future cash flows are discounted to present value at an appropriate rate of return for the investment. The selected discount rate or rate of return should reflect the degree of uncertainty or risk associated with future returns.

Asset Approach

This approach considers the current costs of reproducing or replacing an asset, subtracting accrued depreciation from physical deterioration, functional obsolescence, and economic obsolescence.

Understanding what tangible and intangible assets can add to your business’s worth is essential.

Reconciliation

The method typically depends on the type of company being valued or the industry it operates in. Involving knowledgeable specialists in the valuation process is essential as they understand which factors to consider.

Structure Change

Valuations should be conducted when there are any changes to the structure of the business, such as:

• Raising capital
• Shifting services
• Significant market changes

This will help provide insight into how these changes may affect overall value and help owners make informed decisions about further investments or strategies.

Business Transition

When looking to transition your business, it’s essential to have a professional evaluation done so all parties involved understand the value of the company and can make informed decisions. Regular valuations can help track progress and performance in comparison to industry peers.

Estate and Succession Planning

A valuation is important for estate planning prior to succession planning. Having an accurate assessment of a company’s worth can help determine fair shares for heirs and avoid potential disputes.

Having a current valuation when transitioning ownership of a company can help with distributing assets to all involved parties.

Allocating Resources

Assessing performance compared with other companies within the same industry can help with decisions about where to focus resources and efforts to remain competitive.

Stage 1: Data Collection

Data collection involves gathering financial documents such as income statements, balance sheets, tax returns, and other relevant documents. This helps the valuation expert assess the current performance of the business and how it compares to other similar companies in its industry.

For a comprehensive assessment of a business’s worth, it’s essential to have:

• Financial documents such as the balance sheet, income statement, and cash flow statements provide insight into the company’s financial health
• Details on management team expertise, industry developments, and market size must be considered
• The history and operations of the organization, including products or services they offer, customer relationships, and any liabilities that may affect value
• A record of intangible assets such as brand recognition or intellectual property should also be considered to obtain a precise valuation

Stage 2: Analysis

At this stage, professional valuation experts use financial models and other techniques to calculate an estimated enterprise value for the business based on the data collected in the previous step. Once the enterprise value is established, the equity value can be determined by subtracting debt and other long-term liabilities. The equity value also becomes the key component to the determination of the common equity for a 409A valuation.

Stage 3: Reporting

Findings are presented to management and owners or shareholders. The valuation expert will provide an opinion based on analysis on what they believe to be a fair price for the company and any common stock.

We’re Here to Help

For more details on business valuations for your company, contact your Moss Adams professional.

Additional Resources

• Valuations Services
• Transactions Consulting Services