Companies used to be able to turn to accounting firms or other financial institutions to have a business valuation calculated. It only made sense that these number-savvy individuals who spend much of their workday analyzing financial data would be a good resource for a business valuation service. As with most aspects of business, however, specialization has replaced these old financial wizards with specialized business valuation companies. For a business valuation you can trust, it’s always best to consult an expert in the field. The tricky part is: How do you choose among them?
When it comes to selecting a business valuation company, there are a number of things to keep in mind. Cost and experience are, of course, relevant, but so are the following three often overlooked considerations:
First know why you need a business valuation.
When performing a business valuation, you should start with two things: an understanding of why you need the value the business in the first place, and an assembly of all required information. A business valuation company will help you determine what goes into the latter, but the former is something you should decide for yourself before seeking a business valuation company.
The reason you must start by understanding why you need the valuation is because a business’s value is not absolute. Rather, it depends on two key factors: first, how the business valuation company measures the business’s worth, and secondly, the conditions under which that valuation is performed. These two factors are known as the standard of value and the premise of value.
The method used by a business valuation company to value a given business will largely depend on why that valuation is needed in the first place. For instance, a valuation conducted in anticipation of offering a business on the open market will require a different valuation method than a valuation sought in settling debts with creditors. Based on the reason you’re seeking a valuation, the business valuation firm will utilize one of three valuation methods: a market-based approach, an asset-based approach, or an income-based approach.
A market-based approach to business valuation uses recent sales of similar companies to determine the value of the business in question. The business valuation company will use pricing multiples based on these sales prices to calculate the relationship between the economic performance of the business being valued and its potential selling price.
In the asset-based approach to business valuation, the business’s assets are used to determine its overall value. This method is more involved and requires a higher level of expertise than a market-based valuation. If the business in question is asset rich or you plan to allocate the business’s final purchase price over various assets, an asset-based approach may be worth the additional complexity and cost.
Lastly, an income-based approach calculates a business’s value from its income. To properly calculate a business valuation with an income-based approach, the business valuation company will need to first determine the appropriate valuation multiples and discount and capitalization rates. Income-based valuation methods can be further divided into three separate approaches: the discounted cash flow method, the capitalization or earnings method, or the multiple of discretionary earnings method. Business valuation experts are experienced in each method and can help determine which approach best meets your company and valuation needs.
Be clear on the valuation method(s) the business valuation company will use.
Since business value is not absolute, the business valuation company will likely perform multiple valuations using different methods. When interviewing a business valuation company, ask which valuation process they recommend. Do they have a straightforward yet thorough approach to business valuation?
Make sure you’re comfortable and confident in the business valuation company.
It’s important to feel you’re partnering with an expert you can trust. The beauty of using a professional business valuation company is that you can rest assured they are experienced and understand how the market and individual buyers will value specific rates of return. To ensure the business valuation company you’re consulting with is qualified, ask about their accreditation and experience in your industry. At the end of the day, you want to trust you’re paying for a business valuation that can stand up to all scrutiny.