Understanding the real value of your business is essential for owners. Most people do not consider the benefits of a proper evaluation until they are looking into selling their business. However, there are numerous other reasons to obtain one before that time comes. Business valuations are useful to have before you present your company to investors or buyers, as well as for tax compliance or even estate planning.
For those that are interested in learning how to value a company, there are several different valuation methods you can abide by. The main three types are 1) earnings approach, 2) a market value approach and 3) asset-based approach. By understanding these three types, you will have a better idea of which would be best for your business, and we can compare these styles to the methods Persient utilizes to find your true business value.
A Brief Look:
- Three Main Valuation Methods And Its Pros And Cons
- M&A Specialists Can Help Obtain The Most Value When It Comes Time To Sell
- Persient Uses Their Own Combination Of Different Methods To Extract Premium Valuation
Three Main Valuation Methods
Earnings Approach
One of the fundamental methods of fairly evaluating your business is the earnings approach. With this method, the business valuation revolves around its future revenue and cash flows, based on its current metrics. As profit and sales are the lifeblood of any company, this is one of the most unambiguous ways of quickly understanding the value of a company.
Though there are different ways to quantify a company’s earnings, normally the NPV (net present value) and the capitalization rate formula are used in tandem to get a basic picture. The NPV is divided by the cap rate to demonstrate a business value that includes metrics like annual rate of return, and current free cash flow.
There is no perfect method to determine a company’s true value, so the earnings approach does have some limitations as well. This method excludes qualitative factors and depends entirely on subjective inputs for everything including sales growth as well as various company costs over the next five years.
Market Value Approach
When you are planning to sell any item you likely review the open market and past sales of similar items to get a picture of its current value. In essence, this is the same philosophy behind the market value approach. When you are unsure how to value a company, this can be one of the quickest and most certain methods because it includes sales that have already been made in the same industry.
When using the market value approach, you will review the details of an asset and what price it is currently at or recently sold for. After this, you will compare it with your own asset. Because we are discussing businesses, it is beneficial to consider the industry, geographic location, and size of the comparable business such as the revenues, profits, number of employees, and so on.
You may encounter certain difficulties when using the market value approach. Finding reliable data regarding the sale and features of another company can be challenging at times. Working together with M&A professionals can often help with this gap as they may be more knowledgeable and have reliable data to refer to.
Asset-Based Approach
The asset-based approach to performing a business valuation has some caveats attached to it. This method is more common in real estate or holding companies, but can also be used in asset-intensive businesses or in the event of business liquidation. With this method, you are focusing on the fair market value (FMV) of a company based on its current assets. However, not all assets may be recorded on a company’s balance sheet, or they may have new or unique products that can’t be easily valued at scale.
Finding an M&A Specialist Who Can Help You
Learning how to value a company is a journey and a challenge. Even after studying various methods, you can be faced with uncertainty about which direction to take to find your business value. In truth, the real value of your company is what a willing buyer will pay for it in an open market. Hence, the most realistic and detailed valuations will come from merger and acquisition specialists who have transactional experience in a wide range of different industries.
You built your business up by being an authority in your industry and demonstrating real results. You turn to professional accountants or attorneys when the situation calls for it. When it comes to creating a business valuation, you should enlist the help of professionals that understand the common challenges and pitfalls and can guarantee the best results for your company.
Proper Business Valuation is Both an Art and a Science
Everyone who has ever built a company understands there are certain factors that cannot be quantified. Everything in business revolves around the combination of the tangible and intangible, the art and the science. Mergers and acquisitions are no different and it takes a dedicated professional to stay focused on the ever-changing landscape of business.
You’ve likely encountered this scenario before. You watched as competing companies in your industry sell for massive figures, but when you received your business value or offer, it is less than expected. What’s the real reason for this?
Companies that work with M&A specialists are more likely to receive higher returns for their companies when it comes time to sell. That’s because these specialists understand the nature of the market and all its nuances. You will not only receive a better valuation based on the fundamentals and analytics, but a specialist will understand how to position your company in the current market for higher returns.
The Science (65%)
The science side of business valuation refers to the real world, measurable, and data-driven elements of your company. This includes the previously mentioned valuation methods, as well as financial models, investments, assets, profits, revenue streams, and future developments. While the scientific side is often focused on, many M&A specialists are missing the artistic element.
The Art (35%)
The artistic side includes the intangible factors that will make the difference between an average business valuation, and a blockbuster sale that shakes up your industry. This side of the equation is about creating persuasive influence, timing and positioning the sale, brand identity, brand culture, future outlook, synergy, and your company’s story. You may not realize it, but there are many details of your company that can add to its business value.
Ask the Right Questions
When learning how to value a company and potentially seeking help from an M&A specialist, be prepared to ask the correct questions. These questions will help you differentiate between those that will go the extra mile to get you the best business valuation possible and those that will stick to the basics and a “good enough” approach.
Think about what you need and expect from an M&A advisor, and you can use these questions as a guide.
- Is M&A advisory their primary talent and focus?
- Will they tailor their process based on your needs?
- How many deals do they work on simultaneously? (Are you too small or one of too many?)
- Who will be working on your project at all times? (Who will lead negotiations and discussion with every potential buyer?)
- How did they help former clients resolve conflicts and soft issues when things became challenging during negotiations and due diligence? (Or will they just offer up price discounts to just get a deal done)
Our Approach
At Persient, we have reviewed and tested every business valuation method in the industry. Our approach to valuations combines numerous styles, as well as our own unique methods. We focus on making our clients the hero of the story and going beyond basic fundamentals to illustrate the real proposition that prospective buyers have in hand.
We reach buyers globally and go beyond the limits of other advisors to execute deals that meet every goal and standard you have set for yourself and your company. Persient does not rely on standard theories or models but helps unearth true business value potential and favorable legal terms through a broad, market-clearing bidding process. We design and execute every M&A collaboration with a custom plan that fits into the unique nature of your company. Get in touch today.
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