How Does a Business Valuation Work

A business valuation helps business owners determine their business’s market value. The experienced financial consultants at Rocky Mountain Advisory establish that this valuation is extremely beneficial to business owners and is necessary for various applications, including mergers, divorce settlements, partnerships, business sales, taxation, partner buyouts and settling estates.

Given the significance of a business valuation, it’s essential to understand what a valuation is, who does them, and how a valuation operates. Below we’ll provide you with a comprehensive overview of a business valuation.

What Is a Business Valuation?

A business valuation or company valuation refers to the process of establishing the economic value of a company or a business. As stated above, this valuation can ascertain a company’s value for several reasons, such as divorce proceedings or taxation.

During the entire valuation process, all sectors and departments of a business will be analyzed to determine their worth. The result of the valuation process is often the business’s fair value.

Who Does Business Valuations?

Most businesses outsource business valuation services to professional business evaluators. According to the experienced financial consultants at Rocky Mountain Advisory, a company valuation is a science and an art, where the individuals responsible for the valuation determine its quality.

Note that a valuation comprises an encompassing approach, where the evaluators must integrate professional judgment, statistical analyses, interviews, forensic accounting and various business disciplines. As such, there is a significant need for businesses to use highly qualified business evaluators.

These evaluators include Certified Public Accountants (CPA) and Accredited Senior Appraisers (ASA). Also, note that the experienced financial consultants at Rocky Mountain Advisory point out that various groups like industry experts, business brokers and specialized and credited business appraisers also perform business valuations.

How Does a Business Valuation Work?

Valuating a business depends on the valuation methods that a business prefers. Here is an overview of different business valuation methods and how they work:

· Asset-Based Valuations

This valuation approach focuses on evaluating a business based on its assets. Its primary focus is on a business’s total assets and liabilities. In addition, there are several types of asset-based valuation approaches which include liquidation value, replacement value and book value.

· Market Value Method

This valuation method focuses on getting a business’s market value based on the business’s productive elements in a specific market. The evaluators will check the value for which similar businesses have sold. In short, the market value method focuses on comparing similar companies, industries and transactions. It uses ratios to compare the value of a business against similar businesses that have already been valued.

· Income-Based Valuation

The income-based approach uses a process known as capitalization to value and estimate the flow of income. This method values a business based on its past, present and future cash flows and risks.

The capitalization process analyzes the cash flow that a business’s assets produce, including intangible assets like reputation. Experts in valuation use either the discounted cash flow method or the earning method to evaluate the present value (PV) of a business’s expected earnings.

The Bottom Line

A business valuation enables business owners to know the market value of their company. The individuals responsible for this valuation are accredited and professional business evaluators, such as CPAs and ASAs. These professional evaluators use different methods to establish a business’s valuation, including income-based, market-value and asset-based valuation.