As we previously discussed in our blog article “5 Steps for Managing an Unsolicited Offer,” one of the most critical steps in handling an offer is to obtain a business valuation. Moreover, understanding your company’s worth can be informative for purposes other than selling your business. Getting a valuation done annually can allow you to take advantage of opportunities; below we discuss the why’s, who’s and how’s of obtaining a valuation.
You may first be asking yourself “Why do I need a valuation, I’m not planning on selling my business?” While you may have no immediate plans to sell there are plenty of reasons why an up-to-date valuation is important to have on hand:
- Valuation is a major consideration in onboarding new capital, including both equity and debt.
- You could also be looking to expand by taking on a new partner and would need to know the value to determine the buy-in price.
- In the unfortunate event that something happens in your personal life (i.e.: divorce, family issues or even death) you need to know the value of your business in order to deal with a potential forced sale.
There are many more logical reasons why a valuation is important, but now that you have seen a few of them you probably want to know how to begin getting a valuation. Based on your company’s needs, there are multitudes of ways to determine value, but these three are the most common:
- The Income Approach: This method is forward-looking, relying on the present value of expected cash flow. It is computed by taking the net operating income and dividing it by the capitalization rate to get the market value. This method is more commonly used in real estate and high-growth sectors like technology.
- The Asset Approach: Typically used in distressed situations for the sale of defunct businesses to determine the company’s value. This method focuses on a company’s net asset value (or the fair-market value) of its total assets minus its total liabilities.
- The Market Approach: This is probably the most common way to value a healthy business. It produces a valuation based on a multiple of the company’s past earnings — usually the last 12 months of EBITDA.
By choosing to use a certified appraiser you have saved yourself the headache of determining which method to use and you ensure it is done correctly. Regardless of which method you choose, getting a valuation is essential to your business and can be used for strategic as well as business succession purposes. Reap the benefits of a valuation; acquire a detailed understanding of the financial condition of your business and prepare for the future.
*Looking for an Accredited Valuation Analyst (AVA)? Please contact SDR’s Senior Analyst, Ben Rudman.