When you, the business owner makes the decision to sell his or her company, one of the first steps in the M&A process is determining the value of your business. This will assist the business owner in setting realistic goals as well as being able to present the business in a realistic manner to potential buyers. However, business appraisals are often inconsistent because different methods analyze various aspects of a business in order to arrive at an overall value, depending on the specific valuation firm and the approaches appropriate for the industry.
The following list outlines some of the various appraisal methods that George & Company utilizes in order to evaluate a business to help the seller receive the most accurate portrayal of the position of the business. At George & Company, we typically use a combination of these various approaches so that we may arrive at the most accurate valuation figure. Depending on the type of business being appraised, the valuation methods will vary. The following are some simplified valuation metrics for placing a value on a company.
1. Asset Valuation
An asset valuation examines both tangible and intangible assets held by a company. However, a discrepancy can often arise when measuring intangible assets, as it can prove to be difficult for valuators to assign a numerical value to factors such as goodwill that can be affected by means of knowledge, customer base, recurring revenues, proprietary processes, reputation, etc. Our expert appraisers take an objective perspective when valuing intangible assets so that they can present the most accurate numbers. One way that this may be done is by comparing these qualities to the worth of others’ in the industry.
The asset valuation method also takes into account any liabilities that the company may possess, and subtracts the cost of liabilities from the value of the assets. This type of valuation is all-encompassing because it measures the worth of all important aspects of the business. However, it is less appropriate for a small business because it does not analyze projections of future growth that may be an important factor in the value.
2. Capitalization of Income Valuation
The capitalization of income valuation is most useful for service companies and large businesses because it evaluates intangible assets and determines the worth of future income. This method looks at the current income of the business and uses it to project upcoming profits. The valuator will divide the earnings by risk factors in order to arrive at the capitalization rate.
3. Owner Benefit Valuation
This type of valuation focuses on the owner’s discretionary cash flow projected for the following year. Owner benefit valuations are best suited for smaller companies that place most of their worth on going concern profits.
4. Market Approach
The market approach examines the business’s market worth by examining other businesses within the industry and comparing. This allows business owners to find a ballpark figure of what a buyer would be willing to pay for that specific type of company. The market approach labels the business with a “going rate”. George & Company is a member of the Hall of Fame for Pratt’s Stats, one of the world’s largest data bases of sold companies.
5. Book Value
A book value valuation examines all accounting records and declares the company value based on these numbers. It also helps determine the market value of a company by analyzing the stock prices and the shareholders’ equity. The valuator will divide the stock price per share by the shareholder equity per share in order to find a valuation figure. This method of valuation measures the historical worth of the company, rather than its current market value, but is rarely used for a profitable going concern.
6. Liquidation Value
The liquidation valuation method is the value of a company if the physical assets were to be auctioned on either an orderly or “under the hammer” process.. Liquidation value should not be the sole valuation determiner used to form the business’s sale price, since it would be much easier for the owner to host a liquidation sale than go through the entire M&A process for the same payout price.
7. Discounted Future Earnings Approach
This approach estimates the future earnings of the business by looking at current cash flow and projecting the next five to ten years’ worth of earnings, typically by analyzing EBIT (Earnings Before Interest and Taxes). Then the projected earning numbers for each year are discounted to the current revenue in order to illustrate the net value of the present cash flow.
This is typically only an appropriate approach for larger businesses. It allows the buyer to see the projected value of the company without taking into account any of the potential value that they may add to the business post-closing.
8. Excess Earnings Method
Otherwise known as the IRS method, the excess earnings approach is an exercise in determining goodwill value by examining a fair return on the company’s assets and capitalizing the earnings that exceed a fair return on the assets. This method is commonly utilized as a sanity check of other valuation metrics.
Now that you possess a further understanding of the types of valuations available to price your business, it is in your best interest to contact George & Company to discuss which valuation methods are most appropriate to your specific business. Our expert appraisers will provide you with the most accurate business valuation possible.