You’ve gone ahead and hired a firm to do a business valuation on your company, have all the information for them and are now asking yourself: exactly how will they evaluate my company? This is a good question and one you should ask. The answer, however, is not as simple as you might think. There are three different business valuations that can be used and which one is used is heavily dependent on the type of company you have.
The first method of valuation is the Asset-Based approach. This is one of the simplest approaches to take and involves a couple of ways of doing it. One method of doing an asset-based valuation is to do a liquidation report. This involves what cash would be available if the business’ assets were all sold off, with any debts paid. A rather unforgiving method, this one is done as a basic, kind of bare-bones approach. The other method is to do a going concern report. This takes the business’ total value on paper, subtracts any liabilities and then gives the answer of the company’s net worth. This approach is much fairer, but is still a pretty simple approach to valuation.
The second method also has two approaches, one of which centers on Capitalized Earnings. This approach depends on what returns one can expect in the future, based on their investments. The basic idea of this is often seen on shows like Dragon’s Den. This number is arrived at by way of a complex set of calculations that we don’t need to get into here. Discounted Future Earnings can also be used to calculate a company’s worth. This approach is based on the idea of what the company is expected to make in the future.
The third method is based on Market Value. This is a method that is best compared to the realty market. If you’re selling your house, a realtor will come in and evaluate your home, taking in factors like its condition, size, location, etc. They then come back to you and tell you what its “Market Value” is. You’ve likely heard that term before. What the realtor is doing is to compare your home to others on the market. She / He will use other similar homes’ prices to form an opinion on what the value of your home is. In business, a company’s market value is established by comparing it to other, similar businesses in the area and then a value for your business is arrived at. This is one of the more equitable and attractive approaches for business valuation.
So, which method is going to be used for your business when you’re looking to secure more money? The truth is that some of these methods may not apply to your business, because the nature of it defeats the purpose. If all of these methods apply to your business, then it’s likely that the best approach is to use a combination of all three.