Business owners looking to merge or acquire another business are wise to conduct a business valuation of their target business to get a better understanding of the target's economic value.
Unfortunately, business valuation is not an exact science. There are many methods business owners can use to attempt to determine the value of a business. Each method can result in a different finding. Some examples of common business valuation methods nclude:
- Market value. This form of valuation is similar to the methods used to determine the value of real estate. It relies on the recent sales price of other, similar businesses. Hurdles to utilizing this form of valuation include difficulty accessing data or challenges gathering enough comparables to come up with a realistic value for the business. This method is often recommended as a preliminary approach, best combined with another method of valuation for a more accurate reflection of the business' true worth.
- Market capitalization. This type of valuation is sometimes viewed by business professionals as the easiest way to determine a business' value. It involves multiplying the company's share price by the total number of shares, but it is only workable if there have been recent arm's length sales of the company's securities.
- Asset-based. This approach to valuation focuses on the value of the assets owned by the target business, and subtracts all liabilities and debts. This tends to result in a liquidation value rather than a going concern value of the business.
- ROI. Investors often consider the return on investment (ROI) before moving forward with an investment. A similar process can apply to the valuation of a business by considering historical cash flows.
The type of business can also guide which form of valuation is best. An attorney experienced in business transactions can review your situation and help develop a plan that is more likely to achieve your business goals.