Business valuation services are typically used by banks or those in financial markets to determine fair market price for the purchase/sale of an entire business. There are other aspects that a business valuation company can perform other than answering the question:’what is my business worth?’ such as settling disputes over gift taxation, divorce litigation, and real estate.
Naturally, there are a plethora of factors that go into business valuation services, but the main two components are standards of value and premises of value. Standards of value includes determining what fair market value would be for both the seller and buyer, investment value a business has to a specific company that’s investing in them, and the company’s intrinsic value.
Where standards of value are based more in what the business is worth currently, premises of value focuses on the company’s future potential and any potential debts/obligations.
Here are three of the main elements of business valuation services.
- Economic Conditions: This is the starting point and focuses on the landscape of the business in question. Local, regional, national, and international factors are taken into account when looking at the industry as a whole. Often times this type of information is obtained from the Federal Reserve Board?s Beige Book.
- Financial Analysis: This portion os the assessment focuses on how the company in question compares to its peers. Things like size analysis, ratio analysis, and trend analysis are judged in comparison with other similar companies in the industry to get a better idea of where the company stands in their sector.
- Normalization of Financial Statements: This is the actual bottom-line money the owner of the company essentially makes after everything is accounted for. The simplest way to define normalization in terms of business valuation services is to think of it is the amount of money the owner could take from their business without adversely affecting regular business operations. In other words, if they were keeping only enough money in the business to operate at a neutral clip (no loss, no gain) how much “extra money” would be left annually.
Business valuation is a complicated and often times confusing process, but at the end of the day it’s really just about trying to place a “true” fair value of a company’s overall worth to a potential buyer.