A business valuation is a process whereby a value is placed on a business or a business unit, based on the historical and projected financial performance of the business. It is critical, as a shareholder or business owner, to know what your business is worth in order to make sound business decisions and maintain ongoing business strategy. These decisions can include evaluating or negotiating a possible sale of the business (or a portion thereof), or the planning of a business restructuring by merging into an existing business or acquiring another.
The business valuation will also help raise capital when negotiating with potential investors and financial institutions for funding. Business worth is a very important consideration for individuals with interest in such businesses, especially in the planning of an estate, in the event of marital dissolution or when taking on a buy-and-sell agreement to ensure business continuity.
The valuation of a business unit is a complex affair and there are different methods that can be used to value a business. The most commonly used methods include the following:
Valuation professionals usually calculate the value of a business by using two or more valuation methods. Although the earnings multiple is a good method to use when comparable industry information is available, it remains a challenge to gather reliable financial information on businesses that are private companies and operate in the same industries. This method is therefore only used for businesses where reliable market information exists. Although the discounted cash flow is a complex method of valuation, it is widely used by valuation professionals where reliable accounting records are available. The book value is normally the last resort when calculating the value of a business and is a good test for a valuation that was based on another method.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)