What is a Business Valuation?

by | Jul 15, 2021 | Blog

A business valuation is a process of determining the fair value of a business for a range of reasons, including sale value, partner ownership, taxation, and is a normal part of owning or running a business. 

The Basics of Business Valuation

Business valuations are discussed frequently in corporate finance. The process of determining the current worth of a business, using objective measures, and evaluating all aspects of the entity is known as the valuation of a business. 

Measurement tools used during a business valuation

Among evaluators, businesses, and industries, the tools used for valuation can vary. Business valuations include a review of financial statements, cash flow models, and company comparisons. 

What does a business valuation include?

A professional analysis of the management team, capital structure, earnings prospects, and market value of its assets are some of the data points included in a business valuation. 

Valuation is Important for Tax Reporting

When it comes to tax reporting, accurate valuation is critical. Depending on the fair market value, some tax-related events such as the sale, purchase, or gift of shares will be taxed. 

What Are Some of the Methods Used in the Valuation of a Business?

If you’re considering the purchase or sale of a business, you should brush up on some terms and techniques a business appraisal expert might use during the valuation process. Assessing the market cap, using earnings multipliers, and book value are some of the methods used. 

Market Cap Measurement

The simplest way to value a business is through the market cap. Market Cap is measured using the company’s share price and the number of outstanding shares.

Times Revenue Method

When applying a revenue-based valuation method, a stream of revenues generated over a certain period, applied to a multiplier dependent on the industry and economic environment. 

Earnings Multiplier

Since profits are more reliable than sales revenue in determining a company’s market value. Using the earnings multiplier method takes current interest rates into account when adjusting the P/E ratio.

Discounted Cash Flow

It’s similar to the earnings multiplier in its calculation of a business’s value. Future cash flows are adjusted to get the current market value of the company. The discounted cash flow method takes inflation into account to calculate the present value compared to the profit multipliers method.

Book Value

The balance sheet statement shows the value of shareholders’ equity in a business. The book value is a measure of a company’s assets and liabilities.

Do I need a business valuation? 

Business valuations are an essential part of strategic planning, and they are a vital process to help entrepreneurs avoid significant business failure. They also allow companies to determine the value of the investment they have made. 

Strategic planning and interim management

Strategic planning serves as a map for allocating resources and funding, and it can help business owners make sound decisions. For example, when resources are limited, a strategic plan can provide information on how best to use those resources to create a competitive advantage. Similarly, interim management can provide solutions to problems. In both situations, the purpose is to identify opportunities and solve underlying issues a business may have.

ZOMMA Group id ready to help!

To get an accurate business valuation, you should consider hiring a qualified team, who you can count on ZOMMA Group. Give us a call at 305.444.8288 to schedule a consultation.