Business Valuation: A Complete Guide to Getting Your Business Valuated in Dallas, TX
Business valuation is a complicated process that is used to provide and ascertain the market value of a business. This is the price that financial markets are ready to pay. The valuation price may also be used a means of resolving disputes related to assessing the business’s growth or other strategic financial and operation issues among the stakeholders or business partners.
You may use the valuation to sell your business or come up with a means of equity financing for expansion. We recommend that you get the valuation done by a professional, as this is the best means of arriving at an objective conclusion. With this post we’ll discuss a variety of business valuation methods. There are many external and internal factors that need to distinguished in order to reach a proper valuation of a business, but three formulas (approaches) are applied.
Asset based approach
The first of these is an asset based approach. This method evaluates the price of each asset and then sums up all the values. This can be done in two ways. The first is the going concern approach where all the assets are listed and added in the balance sheet and then subtracted from their liabilities. The other method is the liquidation based approach, where we determine the net cash after subtract it from liabilities. The asset based approach is more difficult with sole traders (proprietorships), because we need to distinguish between assets that are for personal or business use. While in a corporation the assets are owned by the company and thus represent the amount that needs to be sold.
There are three techniques of valuing net assets. The book value approach is almost completely useless. The book value of fixed (non-current) asset amounts are derived from historical sunk costs and relatively arbitrary depreciated values as well. Both amounts are of no use or relevant to any buyer or seller. Current assets may also serve little relevancy as they will require adjustment, other than cash.
Net Realizable Values do not include intangible assets such as good will, brands and customer lists and knowledge and understanding. This value, therefore, is considered equivalent to worst-case scenario and the business should always be worth more than the net realizable value. The seller should not accept below the net realizable amount and it’s wise to hope in getting a better offer.
Replacement values assume what everything would cost if the business were being started in the present. The method can be difficult, as a variety of assets of different ages (and hence depreciation value) will be considered. The value you will get will definitely be lower unless you count in intangible assets, the method proves to have little practical benefit.
Earning Value or Income Approach
This method tries to ascertain business value based on the future value a firm tries to produce, the approach utilizes a number of methods. The approach requires an expected cash flow by using the company’s past earning. It is further normalized for revenues and expenses. The purpose of normalization is to find and identify a business’s capacity to generate revenue and income for the owners. Normalization further fall into four categories which we will not discuss here. The income approach depends upon expectation. It is considered an economic principle as well i.e. expectation.
There are several methods involved like capitalization of earnings or cash flows. A hybrid of the assets and income technique known as the excess earnings method and discounted future cash flows can also be used. The results are multiplied by what is referred to as a capitalization factor. The capitalization factor itself a reflection (indication) of the rate of return a buyer is expected on the money he puts in (invests). It includes a measure or gauge of risk that expected earnings will not be attained. Under this approach, it is generally the fair market value that one gets.
Discounted future earnings: This method employs an average of the trend of predicted future earning used, this as opposed to an average of past earnings. Once again, this method proves a bit tricky to sole proprietors for their businesses. This is because consumer loyalty is tied directly with the owner of the business; an example is an electrician where loyalty lies directly with the experienced proprietor. If the owner changes old, customers will have doubts on the new management’s services.
The capitalization rate is employed to get to the present value of a business’s expected returns. The discount and capitalization rates have a close relation to each other, but can identified separately.
Market Value Approach
The market value approach compares businesses to other similar firms that are being sold in the market. It might have occurred to you this method requires a certain amount of market activity in the industry in order to make a proper comparison.
This approach works best in a healthy market—with a lot of buying and selling of businesses. Chances are high that you are in healthy market if you see that you yourself are doing well, then there will be others who might be willing to enter the industry to get a share of the action.
The volatility of the current economy has made it even more challenging. It’s not that unstable as it used to be but low oil prices have made Texas a sore on the national economy.
There quite a few advantages to valuing your business
You will often receive unsolicited offers for your business, something you should be ready for. You never know you might get one you cannot refuse. You might have got some idea of the complexity involved in business valuation with this post, so you can understand if people you meet do not have a good idea about the methods and techniques used in it.
Valuations help to manage taxes with efficiency. They are a powerful tool when it comes to agreements and help lower the risk of disputes. Furthermore, valuations will highlight a business’s weakness to the owner and this gives him the opportunity to deal with them to protect business value. Something you should remember is that investor’s love and desire liquidity and despise what appear as impediments to it.
Go ahead and give a call to Kirksey Business Brokers we’re your professional partners in reaching that business valuation you’re hoping for. We operate in cities in Texas, Dallas, Grapevine, Bedford, Fort Worth and Keller.