Valuing Your Business? Here’s How Experts Do It

There are many cases where your business may need to be valuated—that is, to see how much your business is really worth. Business valuation comes up and is necessary, in a number of legal scenarios.

When are Valuations Needed?

Valuations may be needed for estate planning purposes, to establish the overall value of the estate.

Because many taxes only come into play when the total value of the estate is over a certain number, it’s important to know how much your value adds to that total. Likewise, if a business will be sold after you are gone, it’s important for your beneficiaries to know what a fair sale price may be.

Businesses also tend to be valuated in divorce cases, and in the event of bankruptcies.

Very Subjective

Whatever the reason, one thing is certain: business appraisals are highly subjective. There are many ways of valuating businesses, and different business valuation experts can yield different value figures.

This is because valuing your business isn’t just about what it’s worth today. Any real valuation needs to account for the future—how much will your business stand to grow or expand or make, in the future? Or will it even grow or expand at all?

Experts predict your business’ future by looking at its past, and the rate of growth it has experienced through the years. They also may look at market factors, and whether the business is in an industry that is shrinking or expanding.

The Ways Experts Value Businesses

A simple way of valuing a business is to use the value of shareholders’ stock, which is a measure of a business’ present and future economic performance. Market capitalization is simply the multiplication of those share prices by the number of shares, to come up with a total number. This method isn’t fully accurate, but it is quick and easy.

Experts will sometimes look at revenues. Experts will utilize a formula or a multiplier of some kind, and apply it to the business’ sales or profits in the past, to measure what those sales or profits may be going forward. Whether the multiplier used is positive or negative, depends on the business’ past performance—shrinking businesses showing continual losses, would use a negative multiplier.

There is no shortage of other methods. Some experts may just multiply actual past revenue going forward. Others use formulas to take into account more exact details, like inflation, cost of goods going up or down, or whether the business has, and collects on, outstanding accounts receivables.

Comping it Out

Another easy way is doing what they do in real estate—just using comps of comparable businesses that have been sold in the past, to see what you would get on the open market for your business if you sold it today.

Call the West Palm Beach business lawyers at The Law Offices of Larry E. Bray today for help with your business or any business problems or questions that you may have.

Sources:

investopedia.com/terms/b/business-valuation.asp

online.hbs.edu/blog/post/how-to-value-a-company