{"id":2189,"date":"2023-06-30T13:01:34","date_gmt":"2023-06-30T13:01:34","guid":{"rendered":"https:\/\/www.smecpa.com\/?p=2189"},"modified":"2023-06-30T13:01:36","modified_gmt":"2023-06-30T13:01:36","slug":"the-importance-of-business-valuation","status":"publish","type":"post","link":"https:\/\/www.smecpa.com\/the-importance-of-business-valuation\/","title":{"rendered":"The Importance of Business Valuation"},"content":{"rendered":"\n<p>To you, the value of your business is the blood, sweat, and tears you\u2019ve put into its success. A formal business valuation puts that hard work into an analysis potential buyers, partners, and investors can understand. Learn the best methods for conducting a business valuation and how to know when your company needs one.&nbsp;<\/p>\n\n\n\n<h2>What is a business valuation?<\/h2>\n\n\n\n<p>In short, a business valuation is the process of determining your company\u2019s fair, economic value. It\u2019s a comprehensive analysis of all areas, departments, and structures, pinning down the current worth of the whole and its parts.&nbsp;<\/p>\n\n\n\n<h2>What will a valuation tell me about my business?<\/h2>\n\n\n\n<p>In practice, a business valuation can help companies discover:<\/p>\n\n\n\n<ul><li>Departments low in profit.<\/li><li>Their overall sales value.&nbsp;<\/li><li>Ways to improve the business structure.<\/li><li>Resolutions for internal disputes.&nbsp;<\/li><li>Tax planning techniques .&nbsp;<\/li><li>Approximate measurements of growth and revenue over time.&nbsp;<\/li><\/ul>\n\n\n\n<p>Valuation information is also integral for major decisions. Whether preparing for a merger or future expansion, you can\u2019t work toward the best outcome without knowing your company\u2019s quantified value.<\/p>\n\n\n\n<h2>What factors contribute to a business\u2019s valuation?<\/h2>\n\n\n\n<p>Different valuation approaches evaluate different factors. However, there are some commonalities to consider. In general, valuation may be affected by your company\u2019s:&nbsp;<\/p>\n\n\n\n<ul><li>Recent transactions.&nbsp;<\/li><li>Industry ratios.<\/li><li>Management structure.<\/li><li>Forecasted revenue growth.&nbsp;<\/li><li>Capital structure.<\/li><li>Financial statements.<\/li><li>Patterns of shareholder payout.&nbsp;<\/li><li>Assets and their market value.<\/li><li>Overall industry trends.&nbsp;<\/li><\/ul>\n\n\n\n<h2>What types of business valuations are there?<\/h2>\n\n\n\n<p>There are a myriad of business valuation methods, and it\u2019s up to you to determine which most accurately reflects your practices and financial situation. Most methods fall into three categories.<\/p>\n\n\n\n<h3>Income approach<\/h3>\n\n\n\n<p>The income approach to business valuation focuses on the company\u2019s anticipated revenue. Value is determined via future profit or cash flow.&nbsp;<\/p>\n\n\n\n<p>The discounted cash flow (DCF) method is just one example of this. It translates cash flow projections into the company\u2019s current market value using the discount rate and time period.&nbsp;<\/p>\n\n\n\n<p>Terminal Cash Flow \/ (1 + Cost of Capital) x Number of Years in the Future<\/p>\n\n\n\n<p>The major benefit of the DCF method is that it can demonstrate a company\u2019s production of liquid assets. However, it relies on often fluctuating values.&nbsp;<\/p>\n\n\n\n<p>Another income approach is the times revenue method. It measures revenue generated over a period of time with a multiplier dependent on the industry.&nbsp;<\/p>\n\n\n\n<h3>Asset Approach<\/h3>\n\n\n\n<p>The asset approach calculates overall asset value for companies with more physical than intangible assets. This approach often isn\u2019t used as many businesses prefer valuation based on future earnings or overall value.&nbsp;<\/p>\n\n\n\n<p>Asset approach methods include:<\/p>\n\n\n\n<ul><li>Book value \u2014 A calculation of tangible assets produced by taking a company\u2019s overall assets and subtracting liabilities and intangible assets&nbsp;<\/li><li>Liquidation value \u2014 A calculation representing the cash amount a business would have left after liquidating all assets and paying all liabilities<\/li><li>Adjusted net asset method \u2014 A calculation that accounts for the fair market value of assets and liabilities&nbsp;<\/li><\/ul>\n\n\n\n<h3>Market Approach<\/h3>\n\n\n\n<p>Market approaches take the entire industry into account by comparing your company with those similar. This typically involves looking at a company\u2019s revenue or their earnings before interest, taxes, depreciation and amortization (EBITDA).&nbsp;<\/p>\n\n\n\n<p>Comparable company analysis is one such method. Using calculated ratios of enterprise value and revenue or enterprise value and EBITDA, you can compare your company with others similar in size and location to determine value. Precedent transaction analysis is an alternative method using comparable companies recently sold.&nbsp;<\/p>\n\n\n\n<h2>When do I need a business valuation?<\/h2>\n\n\n\n<p>One of the best opportunities for a business valuation is <a href=\"https:\/\/www.smecpa.com\/how-to-establish-a-succession-plan-for-your-business\/\">succession planning<\/a>. A valuation highlights your business\u2019s successes and struggles. As a plan is developed, management structures can be built around supporting what\u2019s working and targeting what\u2019s not.&nbsp;<\/p>\n\n\n\n<p>In that same vein, a business valuation provides key information for any major \u2014 or minor \u2014 business decision. It\u2019s like knowing all the cards in your hands before you place a bet. Some prime occasions include:<\/p>\n\n\n\n<ul><li>Selling the company<\/li><li>A merger or acquisition<\/li><li>Tax reporting&nbsp;<\/li><li>A change in partners<\/li><li>Related divorce proceedings&nbsp;<\/li><li>Bankruptcy or litigation&nbsp;<\/li><li>Applying for financing&nbsp;<\/li><li>Insuring the business&nbsp;<\/li><\/ul>\n\n\n\n<p>Even if none of these situations apply to you, an annual business valuation tracks progress and assists with strategic planning.&nbsp;<\/p>\n\n\n\n<p>The only time a business valuation won\u2019t help is when done incorrectly. By teaming up with a qualified financial professional for your business valuation, you\u2019re not only ensuring correct information, you\u2019re utilizing years of experience. Whether you\u2019re looking to raise capital or seek financing, at SME CPA, our team can conduct, interpret, and apply your business valuation to whatever next step comes your way.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>To you, the value of your business is the blood, sweat, and tears you\u2019ve put into its success. A formal business valuation puts that hard work into an analysis potential buyers, partners, and investors can understand. Learn the best methods for conducting a business valuation and how to know when your company needs one.&nbsp; What&hellip;<\/p>\n","protected":false},"author":9,"featured_media":2190,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[1],"tags":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v18.1 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>The Importance of Business Valuation - SME CPA<\/title>\n<meta name=\"description\" content=\"A business valuation puts that hard work into an analysis potential buyers, partners, and investors can understand. 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