We live in a dynamic world, where everything changes all the time. And businesses and their prices are not an exception.
This is why it is important to know the update price of your business once it changes. That’s exactly what we’re going to discuss in this article:
- Why do you need a business valuation
- What do you need for the valuation of the business
- Common company valuation methods
- How to value a business for sale
- How does VDR helps during the company valuation process
Why do you need business valuation
Business valuation is a determination of the market value of the company. According to Al Statz (the founder and president of Exit Strategies Group), there are such benefits from valuing your business:
- Value report card
- Equity transaction enabler
- Shareholder agreement test
- Versatile planning tool
- Executive education
It’s better to know the updated price of your business every time. Sometimes we have to unexpectedly sell the business or gift a part of it to adult kids. Sometimes we make a new business partner. We may get tired of making money and want some rest. Unfortunately, sometimes we have to deal with a business disaster. Whatever your case is, knowing the worth of your business is necessary.
Reasons to initiate the valuation
- Change in ownership
- Gifting shares of a business to children
- Merger or sale to another entity
- New shareholder
- Partner’s leaving off of the business
- Increase in investment capital
- Establishment or annual update of an employee stock ownership plan (ESOP)
- Divorce process
- Estate tax purposes
- Franchising of businesses
For the best result, company valuation should be performed by approved valuation experts. For example:
- Accountants who have relatable experience
- Certified valuers hired by you, and not by the buyer or by bank’s
- Business advisors who can also help to increase the cost of your business during the selling process
- Real estate agents
- Business brokers
- Merger and acquisitions specialists
- Chartered business valuators
You can also get to know how to do a business valuation process on your own with the help of online business valuation tools.
Common company valuation methods
- Future maintainable earnings valuation. It’s a derivation or simplification of the Discounted cash flow (DCF) method.
- Asset valuation is using book values, absolute valuation models such as the analysis of discounted cash flows, option price models, or comparable models.
- Historical earnings valuation. The present value of your business is determined by its ability to capitalize on profits or cash flows and to liquidate debts.
- Relative valuation. It involves the use of similar and comparable assets to value another asset.
- Valuation of discount cash flow. The DCF analysis attempts to determine the value of an investment at the moment, based on projections of the amount of money that will be earned in the future.
- Liquidation value. The liquidation value is the value of the real estate, equipment, and inventory of the enterprise. Intangible assets are excluded from the liquidation value of a company.
Using proven firm valuation methods and their combination helps to avoid mistakes in determining the company’s cost.
How to value business for sale
Quick and simple business valuation
1. Collect all the needed information about your company before valuation. This information might be various for different types of business, but there are some default options similar for every type:
- A history of the company.
- Description of the company
- Governmental documents
- Information on employees, pay plan, balance sheet, and income data
- Tax returns from the last three to five years
- Detailed information about all company assets, including intellectual property, and liabilities
- Current legal problems, including any disputes or other disputes in the process.
2. Decide who will perform the process. Hire a neutral specialist together with your customer if you already have one. In that case, the valuation specialist will not lobby anyone’s interests.
3. Choose the correct methods or a combination of methods.
4. Sell your business to a customer who doesn’t reduce the value of your company.
How does VDR help during business valuation
Here’s how Data room features make your valuation of the business and business sell deals protected and safe:
- Watermarking. Customize your documents to prevent forgery, overuse, and abduction.
- Safe storage of documents. Avoid anxiety during the company valuation process by keeping all documents protected in the virtual data room.
- Long-distance collaboration. Don’t be afraid to hire a professional valuation specialist from another region or even country. Data room allows giving access to documents online, so your helper could view, send, and edit documents without your physical presence.
- Fenced view. As your own documents aren’t public property, you may want to protect documents from accidental view by strangers.
- Remote wiping and shredding. Delete your sensitive documents even after sending this to somebody.
- Visibility at all stages of the deal. Verify your helper actions by checking performed and actions reports. See who, when, and where have viewed, sent, or edited your documents. There is also the possibility of checking the IP, device, and location that the user logs in with.
To sum up briefly
Some tips for a comfortable and profitable business valuation process:
1. Combine methods to find the best way to get to know what your business costs.
2. Don’t lower the price after setting it up.
3. Increase value before selling.