A business valuation is a process of assigning an economic value to your business, and it is beneficial if you are considering your exit. You may also need to get a business valuation if you plan to vet values for a merger and acquisition, family succession, or an ESOP.
According to A Neumann & Associates. LLC, once you have decided to sell your business, the most vital thing to do is seek guidance from a mergers and acquisition professional who knows every aspect of business valuations. Overall, here are the five key aspects of business valuation that you should consider!
#1. Financial Performance
Future profitability is of the utmost importance, as it is the single thing determining a business’s current value. When valuing a company, it is crucial to consider all the capital expenditures that have been planned for or are to be needed in the future. What are the project’s cash flow and profits, and how well were costs controlled to date?
Generally, the price is based on what prospective buyers expect in future earnings rather than how your business has performed in the past. Sure, past revenue tells much about a business’s momentum, but more significant is what is left over after all the expenses of running a business have been paid.
Intangible assets are one of the primary considerations when valuing a firm because it includes the strength of the customer base. Moreover, it is a key aspect because the customer base can provide opportunities for prospective buyers to use as a target audience for other services or goods. Equally considerable is the strength of a business’s brand because it could dictate the potential for other spin-off benefits that are associated with the brand.
#3. Staff and Intellectual Property
Your business’s current management structure is vital for potential buyers or investors. After all, this can determine whether or not the new owners can leave the running of the business to the current staff and not spend time being involved in daily management.
#4. Liabilities and Assets
If you add up the assets and remove the liabilities, you will have the asset valuation of the business. When valuing your business, there is also a need to consider the current situation with orders and the value of all the equipment and property. However, financial services or insurance businesses have few tangible assets, so the real value is typically the cash flow generated through clients.
#5. Aspects Outside Your Business
Other aspects should be considered to get the most accurate business valuation, including how similar businesses are currently valued and the economy’s state at the selling time.
Undoubtedly, you must consider many other aspects of your business, and it is crucial that nothing is missed when valuing your company. You will find that the services of a business broker will leverage valuation options effectively throughout the selling process, succession planning, divestment, or business negotiations.
Understanding how these five aspects influence your business valuation will allow you to learn more about the process and best practices to optimize the selling, transition, or succession process.