Selling A Business or Looking For Investors? 3 Common Valuation Methods to Determine Worth
James Zahansky, AWMA®
Principal/Managing Partner, Investment Advisor & Chief Goals Strategist
Whether you’re thinking about selling your business or are interested in taking on outside investors, it’s crucial that you have an accurate valuation of your business. To value your business, you’ll need to apply standard valuation methods as well as take into consideration the circumstances of different buyers. While there are no fixed rules or formulas, there are common practices.
Here are a few methods commonly used by industry practitioners to value the worth of a company, and several details to consider to help you understand the worth of your business.
Valuation Method #1: Comparable Analysis
One of the more common valuation methods is to take a look at a comparable company that was recently sold or other similar businesses that have known purchasing values. You’ll find a multitude of resources at annual industry conferences or other events to help you discover the selling price of similar companies within your industry.
A common problem with this method is that it often leads to an uneven comparison between companies. Keep in mind that you need to be realistic when comparing your company to others; you can’t compare your small local business, for instance, to a Fortune 500 counterpart.
Valuation Method #2: Asset-Based Valuation
This approach considers your business’s total net asset value minus the value of its liabilities. There are two ways to approach this method.
Going Concern: For a business that does not have plans to sell its assets in the near future, the going-concern approach should be used when developing an asset-based valuation. The formula involved utilizes your business’s current total equity, or assets, minus liabilities.1, 2
Liquidation Value: This approach is based on the assumption that your business is coming to an end and the assets are going to be liquidated. The value of your company’s assets will likely be lower than usual, considering that the liquidation value usually amounts to much less than fair market value. A sort of urgency is utilized with the liquidation value method that other valuation methods may not take into account. When considering methods like these, it is always beneficial to consult a financial advisor.
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Valuation Method #3: Discounted Cash Flow (DCF) Analysis
In this approach, an analyst will forecast the cash flow of the business and discount it at the firm’s weighted average cost of capital (WACC). 3 A DCF analysis is performed by creating a financial model and requires an extensive amount of detail. Of the three approaches, this method requires the most assumptions and often produces the highest value. The effort required to prepare a DCF model often results in the most accurate valuation.
Consider a Variety of Methods
Ultimately, the value of your business will involve considering what you are willing to sell it for as well as the current demand for a business like yours in the market. While there are a number of valuation methods to consider, it’s important to keep in mind that there may not be only one solution. Instead, you may want to utilize a combination of business valuation methods in order to set a selling price. By working with a financial professional who has experience in business valuation, you’ll be much more likely to sell your business for the best price.
At Weiss, Hale & Zahansky Strategic Wealth Advisors we help business owners get set up to successfully achieve their goals from start-up through to succession. Our Plan Well, Invest Well, Live Well™ strategic process takes a long-term, comprehensive, and tailored approach to both personal and business financial planning and investment. To learn more about how we can help you and your business, contact us at (860) 928-2341 or visit our website to request a complimentary consultation.
Presented by Principal/Managing Partner James Zahansky, AWMA®. Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. These materials are general in nature and do not address your specific situation. For your specific investment needs, please discuss your individual circumstances with your representative. Weiss, Hale & Zahansky Strategic Wealth Advisors does not provide tax or legal advice, and nothing in the accompanying pages should be construed as specific tax or legal advice. 697 Pomfret Street, Pomfret Center, CT 06259 and 392-A Merrow Road, Tolland, CT 06084. 860-928-2341. www.whzwealth.com.
1. https://www.investopedia.com/terms/c/comparable-company-analysis-cca.asp
2. https://www.investopedia.com/terms/g/goingconcern.asp
3. https://corporatefinanceinstitute.com/resources/knowledge/modeling/valuation-modeling-in-excel/
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