When a firm is associated with a merger, service startup, acquisition, or liquidation, it is important that it gets skilled recommendations for properly structuring the transition. A business valuation is the process of determining the economic value of a business, giving owners an objective estimate of the value of their company.
Business valuation demands high-level financial analysis. Qualified valuation professionals with appropriate credentials undertake this analysis. To determine the current worth of the company, many techniques are used. The typical standard of value utilized is fair market value. The fair market value is the price at which a business would change hands between an independent buyer and seller having the requisite knowledge and facts; not under any undue influence, and having access to all of the information to make an informed decision.
The valuation process tells the owner what the current worth of their business is by analyzing all aspects of the business, including the company's management, capital structure, future earnings, and the market value of its assets.
Business Valuation Approaches
There are 3 approaches to a business valuation. These include:
Asset-based approaches
An asset-based approach totals up all of the investments in the company to determine the value of the business. When you choose an asset-based approach, all of your investments will be totaled up in one of two ways:
- A going concern asset-based approach, also known as book value, will review your company’s balance sheet, list the business’ total assets, and subtract its total liabilities.
- A liquidation asset-based approach is used when determining the liquidation value or net cash value of your business if all your assets were sold and liabilities paid off. This is a common approach for business owners who are looking to sell their business or get out from under it.
Asset-based approaches work well for corporations, as the company owns all the assets and are included in the sale of the business. For sole proprietorships, however, this approach can be a more difficult means of evaluation. If any assets belong to or are in the name of the sole proprietor, separating the value of business assets from their personal assets.
Earning value approaches
The "earning value" approach evaluates businesses based on their ability to produce wealth in the future. This approach is generally used for a company that is looking to buy or merge with another company. There are two types of earning value approaches:
Capitalizing past earnings
This method reports the company’s usage of past earnings, normalizes them, and then multiplies the expected normalized cash flows by a capitalization factor. This rate is what a reasonable purchaser would expect on their investment of the business.
Discounted future earnings
This approach averages the trend of predicted future earnings for the company and then divides it by the same capitalization factor.
Market value approaches
Under the market approach to business valuation, one consults the marketplace for indications of business value. Most commonly, sales of similar businesses are studied to collect comparative evidence that can be used to estimate the value of the subject business. This approach uses the economic principle of competition, which seeks to estimate the value of a business in comparison to similar businesses whose value has been recently established by the market.
The business valuation methods under the market approach are:
- Comparative company market multiple methods.
- Comparable transactions multiple methods
- Market value methods (quoted securities)
How can SPK Auditors help with Business Valuation Services?
SPK Auditors can assist businesses with valuation services by providing an independent and objective evaluation of the value of a business. This can be useful for a variety of purposes, such as:
- Mergers and Acquisitions: When a business is being acquired or merged, a valuation can help determine the fair market value of the business, which can be used to negotiate the purchase price.
- Estate and Gift Tax Planning: Business owners can use a valuation to determine the value of their business for estate and gift tax planning purposes.
- Employee Stock Ownership Plans (ESOPs): A valuation can be used to determine the value of a business's stock for purposes of establishing an Employee Stock Ownership Plan (ESOP).
- Litigation: In some cases, a valuation may be necessary for purposes of litigation, such as divorce proceedings or shareholder disputes.
- Financial Reporting: A valuation can be used for financial reporting purposes, such as determining the value of intangible assets on a company's balance sheet.
SPK Auditors can provide a comprehensive valuation report which will give a clear explanation of the methodology used to arrive at the valuation and the assumptions made in the analysis. By working with SPK Auditors for business valuation services, businesses can benefit from the expertise and objectivity of a professional valuation firm, which can help ensure that the valuation is accurate and reliable.