Six Things to Keep in Mind with The Business Valuation Process

Suppose you have never had a business valuation before. In that case, you might need to rely on the services provided by your online business broker to clarify that you are all on the same page and that you have done all of the necessary leg work to enhance your multiplier as much as possible.

Business Valuation Process

Business Valuation is the process of determining a business’s value or worth, usually to sell it. The business valuation process is composed of several steps but more importantly, it involves key elements that one must keep in mind when going through the process.

The process of business valuation includes the following key elements: choosing the right valuation method, gathering financial data, performing the valuation analysis, preparing the valuation report, and reviewing the report.

1. Choose The Right Valuation Method

Before we define the business valuation process, we must first understand what the structure of the company is and benchmark it with comparable companies and only then can we choose the right valuation method to implement.

Here are the common methods of valuation used:

Income Approach

This approach evaluates the future profits of the company. Under this approach, the following methods are used:

1. Discounted Cash Flow Method
   
2. Capitalization of Earnings Method 

Market Approach

Here, similar businesses that have been sold recently become the basis of valuation. Two different types of analysis can become the basis of the valuation such as:

1. Precent Transactions Analysis
   
2. Comparable Company Analysis 

Asset-Based Approach

This approach relies on the valuation based off of its Balance Sheet – the value of the assets or liabilities. These following methods are used:

1. Book Value Method
   
2. Adjusted Net Asset Method

2. Gather Comprehensive Financial Data

Now that we have identified the different valuation approaches and methods that can be used, the real question now is, how does the business valuation process work?

One of the most critical aspects of selling your online business, whether it’s selling an Amazon FBA business or selling your website, is taking a good look at your financials. This step alone can tell you whether or not you’re on track.

Here, you need to prepare the following sets of documents: financial statements, tax documents, legal documents such as contracts, business plans and other documents that will be needed for valuation.  To get an accurate picture of the valuation, the documents – especially the financial statements – will need to be accurately recorded as well.

As business owners, you need to have a clear perspective about the work you have done to organize financials and present a compelling picture to possible buyers. When you have this information organized and upfront and if an ideal buyer comes along, it will be that much easier for you to negotiate this into a sale or to illustrate that your asking price is indeed fair.

3. Consider Intangible Assets

The meaning of business valuation process now also includes taking into account intangible assets when computing the value of the business. The traditional approaches only took account of physical assets when computing the value of the company. This is not the case now.

Below outlines the reasons why intangible assets are important in the valuation:

• They add value to the overall worth of the business.
  
• It increases the competitive advantage of the company.
  
• They play a role in revenue contribution.
  
• They provided significant impact in mergers and acquisitions.
  
• Accurate recording of the balance sheet includes the real value of intangible assets.
  
• There are implications in the legal and tax aspects when intangible assets are not included.
  
• Determining the actual value of intangible assets also include providing a correct assessment of the risks they bring and consequently, managing them.
  
• Knowing the value of intangible assets can be a key element in the strategic planning of the business.

4. Understand Market Conditions

Probably the key element in the business valuation process, more than the method and actual process, is having an understanding of the market and how it affects the business and its valuation.

The small business valuation process is no different from large corporations – both account for the status of the market and how it affects the valuation.

A similar company that recently sold becomes a basis for valuation of a business who uses the market approach. The growth rate of a business is dependent on how the market behaves for the industry the business belongs to. A real estate business is highly dependent on the strength of the market.

5. Account For Future Growth Potential

The valuation process in business does not stop with accounting for present and historical data. More importantly, the future outlook of the business is taken into consideration because it drives the growth potential of the business which means, potential for a higher net income.

Effects of the market condition in the business valuation includes the following:

• It directly influences the valuation result for market based approaches. The process of discounting cash flow in the valuation method (Discounted Cash Flow) accounts for the future cash flows of the business. If the market potential is promising, so will the valuation results.
  
• It attracts or deflects investors. A business that has high growth potential attracts investors who are even willing to pay a premium as opposed to businesses that are not doing well in the market.
  
• Competitive advantage can be used as a leverage. There are certain businesses that naturally capture market share and increase growth potential. These are businesses with strong brands that also offer product uniqueness and also consist of proprietary technology. With a competitive advantage, the value of the business increases.
  

These are just a few examples of how the growth potential of the business is affected by the market. Investors looking to diversify are more inclined to buy businesses that show promising growth potential. 

6. Seek Professional Expertise

If you are disappointed when you discover the estimated value of your company, don’t give up hope. There is still the possibility that you could take some critical planning steps to enhance what is on the line for you and your business. The sooner that you talk to an online business broker and seek professional expertise, the easier it will be to figure out whether or not now is the right time for you to accomplish your underlying goals and how to best proceed with this process.

A business professional will be able to reach out to experts in valuing your business properly and reach out to a network of buyers to ensure that the whole process is executed with exceptional results.

What is business valuation process without an expert’s valuable input? So, schedule a consultation with Website Closers today to start your journey and get an accurate valuation of your business. We know how this process works from end to end and how to make it easier for you to accomplish your goals from the time of listing through the final sale.

Process For Business Valuation: Conclusion

Looking disorganized does not bode well for a prospective seller because the possible buyer might assume that this will be indicative of the overall experience of working with you. You need to be prepared in advance and should have the services of an experienced online business broker as soon as possible after you decide to list the company for sale.

This way you’ll know what to expect and can avoid common missteps that could slow down or block the sales process altogether. One key way to feel as prepared as possible for your business sale is to consider business valuation. When done right in the hands of experts, the transaction will run smoothly and deliver more than satisfactory results for all parties involved.