If you are considering buying or investing in a business, how do you know exactly what the business is worth? In most cases, the buyer and the seller have different ideas of what the business is worth. The seller has often spent a large amount of time and energy working on the business; this time and energy may not be reflected in the value. Buyers hope to purchase the business for a good price. The challenge is to come up with a value that satisfies the buyer and the seller. Corporate valuation services are the key.
Calculating the Value of a Business
There are several ways to determine the value of a business; here are a few of the more common methods:
Assets and Liabilities Valuation
The simplest way to estimate the value of the business is to calculate the total assets, and subtract the total liabilities. This may not provide the entire picture, but it is a good starting point. This method works well for the tangible assets, but it does not consider intangible assets. Tangible assets such as inventory, cash on hand, and equipment are easy to measure. Intangible assets such as the brand, logo, company history and culture are much more difficult to measure.
Liquidation Value
Liquidation value is a measure of what the company’s assets would be worth if they were sold immediately.
Income Capitalization
This formula considers the income potential of a business’s historical value and economic assumptions
Income Multiple
To calculate this value, simply multiply the yearly earnings by the number of years the company is expected to remain in operation. Unfortunately, past performance is no guarantee of the future; this number is subjective and dependent on uncontrollable factors.
Rule of Thumb
To use this method, find the total annual sales income, and multiply it by a “revenue percentage.” This percentage varies based on the type of business, and is widely available online or in business textbooks. This method provides a very rough estimate, and is not typically used by a business valuation expert.
Be Sure to Get the Big Picture
Make sure you get the whole picture when you are considering purchasing or investing in a company. When you contract with a professional company valuation firm to provide corporate valuation services, be sure that this professional is accounting for all assets, liabilities, revenue history and earning potential. In addition, the future value of the business depends greatly on its future owner. This future owner’s plans for the business are important, and must be considered to determine an accurate value. A business that will be closed un-liquidated cannot be accurately compared with a business that will continue operating and expand in future. Make sure your valuation expert understands your plans for the business.
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Veriti’s forensic investigative accounting professionals have completed hundreds of business valuations in a wide range of industries throughout the United States and internationally. Learn more about our business valuation services by calling 855.232.4410 or contact us via email.