Also known as a company valuation, a business valuation is the process by which the actual fair market value of a business is determined. Determining the true economic value of a business can be a complex process, with many factors being taken into consideration. Every aspect of a business will be analyzed to determine the worth of the business as a whole, and the value of the departments or units within the business.

Companies choose business valuations as a means to determine the fair market value of their company for many reasons, including establishing partner ownership, sale value, taxation, and even divorce settlements. Business owners often utilize professional business valuation services to get an objective, unbiased estimate of the true value of their company.

The Basics of Business Valuation

Business valuation is a topic frequently discussed in the world of corporate finance. These valuations most commonly occur when an organization wants to sell all or a portion of its business operations or is looking to acquire or merge with another business. With business appraisal services, the current and true value of the company is determined by evaluating every aspect of the organization through the use of objective measures.

The IRS (Internal Revenue Service) requires businesses to provide valuations based on their current market value. Purchasing, selling, or gifting shares of the company will be taxed based on the valuation, making objective appraisal services vital to every business for accurately reporting their taxes.

To determine the worth of a business, various factors such as its management, capital structure, future earnings potential, and asset market value may be analyzed through a business valuation. The methods employed in the valuation process can differ depending on the evaluator, the business being assessed, and the industry. The most common techniques for business valuation are examining financial statements, utilizing discounting cash flow models, and comparing the company with similar ones.

Methods of Valuation

There are several methods used by professional business appraisal services to determine the true value of a company. Some of these methods include:

Market Capitalization
The most straightforward way to value a business is through its market capitalization, which is determined by multiplying its share price by the total number of outstanding shares. As an illustration, a company is trading at $86.35 per share, with 7.715 billion shares outstanding. Therefore, the company’s value was $86.35 multiplied by 7.715 billion, which amounts to $666.19 billion.

Times Revenue Method
The times revenue method of business valuation involves taking a series of revenues generated during a specific timeframe and multiplying it by a factor that varies depending on the economic environment and industry. To illustrate, a technology firm may be valued at three times its revenue, while a service-based business could be valued at half its revenue, equivalent to 0.5 times revenue.

Earnings Multiplier
The earnings multiplier is an alternative to the times revenue method, providing a more precise estimation of a company’s actual worth. This is because a company’s earnings offer a more dependable measure of its financial performance than revenue. The earnings multiplier considers future profits against cash flow that could be invested at the present interest rate for the same duration. In essence, it modifies the current P/E (price-to-earnings) ratio to account for the current interest rates.

Discounted Cash Flow (DCF) Method
The discounted cash flow (DCF) method for business valuation shares similarities with the earnings multiplier approach. However, the DCF method entails projecting future cash flows and then adjusting them to determine the company’s present market value. The primary variance between the profit multiplier and discounted cash flow methods is that the latter incorporates inflation when computing the current value.

Book Value
The book value of a business, as depicted on the balance sheet, refers to the value of shareholders’ equity. This value is determined by deducting the company’s total liabilities from its total assets.

Liquidation Value
The liquidation value of a business is the remaining cash that the company would acquire if it were to liquidate all its assets and discharge its liabilities immediately. It’s essential to note that this list of business valuation methods is not exhaustive. Other methods used include replacement value, breakup value, asset-based valuation, and several others.

Accreditation in Business Valuation

In the United States, the Accredited in Business Valuation (ABV) is a professional certification bestowed upon accountants, including Certified Public Accountants (CPAs), who specialize in business valuation. The American Institute of Certified Public Accountants (AICPA) is responsible for overseeing the ABV certification. Candidates must satisfy the minimum educational and business experience prerequisites, complete an application process, pass an exam, and pay a credential fee (as of March 11, 2022, the annual ABV Credential fee was $380).

Holders of the ABV credential must maintain minimum standards for lifelong learning and work experience to retain their certification. Those who meet these standards are authorized to include the ABV designation after their names, which can lead to enhanced career opportunities, professional standing, and salary. In Canada, the Chartered Business Valuator (CBV) is the professional designation for specialists in business valuation. The Canadian Institute of Chartered Business Valuators (CICBV) awards this certification.

RDC Appraisals, LLC

If you have spent a considerable portion of your life creating, developing, and fostering a successful business, you might now be contemplating selling it. Alternatively, you may search for opportunities to expand or acquire new ventures. Undoubtedly, the last thing you want is to undervalue your hard work or pay an exorbitant amount for an established business. Hence, it’s crucial to seek the expertise of a professional, experienced firm that can provide an accurate assessment of the business’s fair market value. RDC Appraisals, LLC, established in 1990, specializes in business valuations in New York and New Jersey and has been delivering business appraisal services to its clients. Contact us today to learn more.