Everything You Need to Know About Valuating a Business

A business valuation in New York, Pennsylvania, or anywhere in the country is important to buyers and sellers alike. After all, without proper business valuation methodology, it becomes very difficult to establish a fair selling price for any business.

However, despite its undeniable importance, many buyers and sellers take the wrong approach when valuating a business. This either completely minimizes their chances of buying or selling a business, or potentially means they pay more than they should have or end up selling their business for less than it’s worth.

Common Business Valuation Methods

There are many different methodologies and schools of thought when it comes to determining how much a business is reasonably worth. Some of the most widely used methods to calculate a business’ value are applying a set multiple to average yearly revenues or average yearly profits, or looking at a company’s assets and liabilities to get a sense of how much it is realistically worth.

For the first two methods ofvaluation, it’s important to note that the multiple used is often dependent on the industry or type of business, and using profit – or better cash flow – instead of revenue is typically the best way to go about this calculation.

This is because the bottom line is what actually matters to an existing or new owner, and profit margins can vary massively from business to business or even from year to year.

However, even with the aforementioned considerations and adjustments, all three of these methods of valuation are still, in most cases, too simplistic and therefore don’t give the full picture.

The Alternative: Professional Business Valuation

Even if you’re good with numbers and can read a balance sheet, it’s best to hire a professional when it comes to a business valuation, irrespective of whether you’re the buyer or the seller.

The valuation an accredited professional business valuation firm or individual consultant provides is much closer to the real, inherent fair market value of a company. This is because they consider countless other factors and variables which most of the commonly used business valuation models neglect to take into account.

This includes things such as brand value, management structure, how profits have increased or dropped over time, cashflow fluctuations, plus many other important considerations.

Note: For someone to be properly qualified to valuate a business in the United States, they should be certified by an organization such as the Appraisal Foundation and the Institute of Business Appraisers, among others.

Market Value vs Investment Value

There are a few different ways to look at a business’ value, and the two most important are its market value and its synergistic (investment) value.

A company’s market value is how much it’s worth based on what a buyer or investor would realistically expect to pay to buy a particular business in the market at a particular point in time. On the other hand, a business’ synergistic (investment) value not only involves looking at how much it is worth based on market conditions, but also how much it is worth to the particular prospect buyer after obtaining certain costs savings in combing operations with the buyer’s company.

In some cases, a business’ market value will be identical to its investment value, but in many cases there can be a significant difference between the two.