Looking for a Business Valuation Service? See How Much Your Company is Worth
Using a business valuation service can be a great way to prepare for a successful business sale at the best possible purchase price and terms. But what does the service consider, and what other benefits does it have besides getting a better exit deal?
Today's guide explores the general process, benefits, requirements, and considerations in a business valuation. We'll also discuss how you can choose the right valuation experts.
When it comes to choosing experts, Exitwise can help you hire the best in your industry, such as business appraisers, accountants, corporate lawyers, and wealth advisors.
These experts can ensure a successful valuation that aligns with your business goals, especially a successful exit. Let us help you hire and manage the best M&A experts today!
What is a Professional Business Valuation?
A professional business valuation is the process of determining a business's overall economic worth, and it is carried out by an accredited or certified business evaluator.
Also called company valuations, business valuations are done to objectively assess and value a whole business or parts of its operations.
When Should You Consider Using a Business Valuation Service?
You can consider using business valuation services in situations such as:
When selling business to employees or another individual or business
When changing ownership as part of retirement or succession plans
When merging your business with another one
When looking for funding to support growth
During legal considerations, such as divorce cases or tax proceedings with the IRS
When exploring a strategic exit planning to maximize the value of the business before selling
When settling partnership or shareholder disputes to arrive at a fair settlement for the ownership interest.
Most owners or founders typically require business valuation services when looking to sell their business to retire or explore other investment options.
Benefits of Performing a Business Valuation Analysis
Here are some key benefits of carrying a business valuation before an exit:
Enhancing M&A Negotiations: If you and the buyer agree that the indicated value is fair, a valuation can help you agree on the best terms and purchase price. This can significantly shorten the timeline for when to sell your business.
Benchmarking Performance or Growth: You'll get a clear picture of how your business is performing or growing compared to its peers in the same industry. You can ask for a higher sale price if you are doing much better, besides being able to determine if it's the best time to sell.
Informed Exit Strategy: A valuation shows your business's weaknesses and strengths. You'll want to improve your strengths and correct your shortcomings to improve and maximize business value before exiting.
Setting Expectations Right: You may have a right or wrong value assigned to your business, consciously or subconsciously. Valuation helps you discover the actual value so you don't leave money on the table by undercharging or overcharging potential buyers.
What is Included in a Business Valuation?
The considerations in a valuation can vary widely depending on the business valuation expert. Here are some items that are typically included:
All liabilities and tangible assets
All applicable intangible assets like goodwill
Acceptable business valuation methods
Future earnings potential
Current capital structure
Market or competitor analysis
Management and employee review
Owner involvement review if you have a significant influence over the business' daily operations
Valuation agreement detailing aspects like fees and expected duration of the exercise
Valuation report or summary showing the value and recommendations.
The valuation expert may also provide 24/7 valuation support services when you have queries during the process.
Key Business Valuation Methods
Valuation methods fall into three main categories:
Asset approach, such as replacement cost
Income approach, such as Discounted Cash Flow
Market approach, such as company comparables and precedent transactions.
Let's look at different methods under these approaches:
Replacement Cost
Business valuation professionals use this method to determine the cost of acquiring or reproducing a business's assets with similar new ones at prevailing market prices.
Discounted Cash Flow Method
The discounted cash flow (DCF) method is popular because it considers key internal business aspects, such as expected future cash flows, and external ones, like inflation.
The DCF method uses the following formula:
Present value of the business = Sum of discounted projected cash flows + Discounted Terminal value
Where;
Total DCF (Sum of discounted future cash flows) = CF₁ ÷ (1 + r)¹ + CF₂ ÷ (1 + r)² + … + CFₙ ÷ (1 + r)ⁿ
n is the final year of the projection period
r is the discount rate
CF is the cash flow for a given year in the projected period
Terminal value = EBITDA in the final year x The exit multiple (as per the exit multiple approach)
Discounted Terminal Value = Terminal value ÷ (1 + discount rate)^the number of the final year.
Company Comparable Analysis
Valuation advisory experts can measure the value of a business based on the worth of similar publicly traded companies.
The method applies different multiples, like EBITDA, to show how much a business is worth its EBITDA.
Precedent Transactions Method
Business appraisers can compare the sale multiples and prices of businesses that have recently been sold in your industry to estimate your business's relative value.
Other key market-based valuation methods include revenue multiple, EBITDA multiple, and seller's discretionary earnings multiple.
Seller's Discretionary Earnings
The seller's discretionary earnings (SDE) approach applies a market-derived multiple to your total annual financial benefit from the business as the owner. The valuer considers the multiples and sale prices of similar businesses sold recently.
Pro Tip: Most business valuations require several methods for comparison and control. One method may also use different types of valuations. For example, DCF valuation includes a market-derived EBITDA multiple in calculating the discounted terminal value.
How to Choose the Right Business Valuation Service
Choosing the right business valuation consulting service can be challenging if you are unsure what to consider.
Here are five key considerations:
1. Accreditation
Check that the business appraiser is accredited to validate their knowledge and expertise.
Some accreditations to consider include:
Accredited in Business Valuation (ABV): Certified Public Accountants usually receive this accreditation from the American Institute of CPAs (AICPA).
Certified Financial Analyst (CFA): This is offered by the CFA Institute.
Accredited Senior Appraiser (ASA): This is offered by the American Society of Appraisers (ASA).
Certified Valuation Analysts (CVA): This is from NACVA.
Chartered Business Valuator (CBV): This is offered jointly by the Chartered Business Valuators (CBV) Institute and the Canadian Institute of Chartered Business Valuators (CICBV).
2. Industry Experience
Look for a business valuator with years of active experience in your industry.
Having experience in your specific business type will be an extra advantage.
3. Financial and Business Acumen
If your valuation solutions provider has business and financial acumen, they will be better able to understand you, your business, and the importance of the valuation.
4. Availability
Whether you opt for an offline or online business appraisal service, you'll want an expert who is available most of the time to answer your questions or concerns.
Working with an offline valuator may be better if you need in-person meetings.
5. Willingness to Support and Defend the Valuation
Depending on the situation, you may need your business appraiser to defend or support their valuation.
For example, you may need them to explain their methods and results to a potential buyer during negotiations. Look for an expert willing to stand by their work and help you negotiate a better price.
Free Business Valuation Calculator by Exitwise
Getting an estimated value of your business is an excellent idea before you contact professionals. You can use online calculators to get an estimate.
At Exitwise, we offer a free valuation calculator that you can use to understand your business's real-time value based on your industry, financials, and operations.
Here's how to use the calculator:
Indicate your sector and industry from the dropdown menu under the industry section.
Enter your financial details. The calculator requires revenues and EBITDA for the last two years. You'll also need to indicate the projected amounts for these two metrics for the current and next year.
The third step requires gauging your business using the indicated internal and external value drivers, such as the quality of the management team and reliance on key suppliers. As you adjust the value drivers accordingly, you can see the business valuation range changing.
Lastly, you can access your free valuation report, which includes the business valuation range, EBITDA multiple range, and revenue or AAR multiple range.
Hire Valuation Specialists and M&A Experts through Exitwise
Hiring the right valuation specialists and M&A experts alone can be overwhelming. When you work with us at Exitwise, we help you interview, hire, and manage different M&A experts through our proven three-step process.
We can help you find business brokers, wealth advisors, investment bankers, tax accountants, and valuation specialists for a holistic approach to your business exit.
Here's how it works:
We do an initial consultation with you in which we learn about you, your business, and your goals.
We connect you with M&A experts from our pool of trusted industry-specific experts.
We'll help you interview, choose, and hire each professional and advise you throughout the process until your business sells.
We can help you streamline your M&A process and sell sooner at the best price. Set up a time to chat with us today.
Frequently Asked Questions (FAQs)
Let's end the guide with questions most business owners ask about business valuation services:
What is Certified Business Valuation?
A certified business valuation is an appraisal done by a certified or accredited professional business valuer.
What is the Business Valuation Formula?
The DCF formula is considered the business valuation formula because it uses comprehensive metrics that mirror a business’s true financial performance, including terminal value and projected free cash flows.
The method also considers investment risk and the time value of money using a discount rate (the weighted average cost of capital), which also factors in the cost of debt and the cost of equity. The rate is important because money in the future is less worth than today’s money.
Here's a quick overview of the formula:
Present value of the business = Sum of discounted projected cash flows + Discounted Terminal value
We’ve discussed the specific variables that plug into this formula under the Key Business Valuation Methods section above.
What is the Business Valuation Cost?
The cost to value your business can range from free to tens of thousands and up to $100,000 or more.
Business valuation charges depend on the type of business or industry, business size, valuer, reason for the valuation, and the type of valuation.
We can help you negotiate favorable terms and fees with the business valuer you select.
What Information is Required for a Business Valuation?
Your business valuator may ask for information such as:
Basic details about your business, including the name and location
Financial statements for the last 3-5 years
Competitor, supplier, and client information as necessary
Interim financial projections
Any business planning materials you may have
Premises details, such as BC assessment if you own the premises or lease if you rent
Substantial agreements, such as supplier and creditor agreements
Comprehensive list of assets and liabilities
Filled in business analysis questionnaire
Tax returns or records for the last 3-5 years
Any other necessary information that may help with the valuation or sale.
Conclusion
A business valuation service is ideal for securing a successful sale at the best price possible, given that it helps you understand the current worth of your business. Besides, you can identify growth opportunities to maximize business value before the big exit.
You'll want to work with M&A experts and valuation specialists to help you make an objective valuation and sell your business sooner at a favorable price.
Schedule a consultation with our team today to hire a competent M&A team for the exit of your dreams!
