What is your business worth if you sold it today? Many owners can only hazard a guess when asked this question. Read on to understand business valuation and why it provides critical insights for owners, investors, and leadership teams.
What is Business Valuation?
Business valuation establishes a company’s economic worth at a point in time. It comprehensively analyzes the firm’s assets, operations, financials, market position, and prospects to quantify its fair market value.
The output is a defensible dollar figure representing what the business would sell for in an arms-length transaction to a qualified buyer under normal circumstances. Common questions valuation seeks to answer:
- What price would the business reasonably fetch in a sale?
- How much are the company’s shares worth for equity investment or transfer?
- What value should be used for estate, gift, or other tax purposes?
In short, valuation objectively measures any business’s current value as a saleable going concern.
Business valuations serve several practical purposes:
Sales and Divestitures
During mergers and acquisitions, business sales, or spin-offs, valuation guides negotiations in setting rational asking prices and purchase terms.
Securing Equity Investment
Seeking outside investment requires determining fair percentages of ownership to grant based on fundamental company value.
Shareholder and Partnership Disputes
When shareholders or partners feud over relative ownership stakes, impartial valuations help
resolve disputes.
Tax Optimization and Reporting
Valuations substantiate values for gift, estate, inheritance, and income tax compliance.
Marital Dissolution
Divorce proceedings involving business assets rely on experts to value ownership interests allocated to each spouse.
Financing and Capitalization
Lenders and investors depend on business valuations to underwrite commercial loans and funding-providing capital.
Financial and Regulatory Reporting
Public companies require valuation for purchase accounting, goodwill impairment, equity compensation, and various reporting disclosures.
In all these scenarios, the goal is to determine a rock-solid objective and fair market value for the business.
How to Value a Business
Several accepted models exist for valuing companies. Skilled appraisers thoughtfully select and
blend methods based on factors like industry, profitability, growth, and asset mix.
Market Capitalization
For publicly traded companies, market capitalization represents the current collective valuation. It equals the share price multiplied by the total diluted shares outstanding. This derives value based on incremental buying and selling in public markets.
Discounted Cash Flow (DCF)
DCF models project future free cash flows over a discrete period plus a terminal value. These future cash flows get discounted to present value using a risk-adjusted discount rate like the weighted average cost of capital. The summation of discounted cash flows indicates the total value.
Revenue Multiples
Particularly for high-growth firms yet to reach profitability, value may be estimated as a multiple of revenue. Technology companies frequently trade between 5x to 8x revenue, for example. Multiples derive from public comparables.
Earnings Multiples
Mature businesses with steady profitability may be valued using consistent earnings multiple in line with similar public companies. Consumer products companies often trade between 10x to 25x earnings.
Asset-Based Approaches
Adjusted book value or hypothetical liquidation value establishes lower bound valuations based on balance sheet assets. These represent value floors assuming a worst-case sale of discrete assets.
Replacement Cost Method
The estimated full cost to recreate tangible assets for capital-intensive companies approximates a baseline valuation. This equals the cheaper of reproducing or replacing the asset base.
Rather than relying on a single method, skilled appraisers carefully synthesize multiple
approaches to value companies holistically. The specific blend selected depends on the business’s profile, industry, profitability, growth, risk, and asset mix.
How to Read a Business Valuation
Once the valuation analysis is complete, the end deliverable provides several key outputs:
The most fundamental output is an integrated fair market value estimate for the entire company as a whole.
However, valuations frequently also assess and value distinct segments of the business, including individual business units, product lines, brands, technologies, real estate holdings, and other tangible and intangible assets.
The valuation will also present the estimated fair value of solely the equity portion of the business, factoring out debt obligations and other senior claims that would have priority.
These core components of the complete valuation allow deal parties to structure acquisitions, settle ownership transfers, satisfy tax authorities, and resolve disputes by relying upon an impartial, defensible estimate of business value.
The Role of Professional Business Appraisers
Even with access to online tools and benchmarks, serious valuations required for high-stakes transactions or litigation typically require engaging an expert. Why?
Independent Objectivity
External professionals counterbalance internal biases and provide arm’s length estimates, avoiding distortions that owners, buyers, or investors may introduce.
Valuation Methodology Expertise
They determine the most appropriate methods for the company’s profile and industry, properly applying them to value the entity.
Defensible Assumptions
Experts underpin assumptions on growth, profit margins, multiples, discount rates, capitalization, premiums/discounts, and other key inputs with sound rationales.
Authoritative Reports
Courts, tax authorities, and counterparties afford more credibility to a certified expert’s value conclusion derived using rigorous methodology.
For serious valuation purposes, a professional report lends confidence.
Accreditation in Business Valuation
Several credentials certify valuation expertise:
- Accredited in Business Valuation (ABV) – For CPAs, conferred by the American Institute of CPAs after examination.
- Certified Business Valuation Analyst (CBVA) – Business valuation certification from the National Association of Certified Valuation Analysts (NACVA).
- Certified Valuation Analyst (CVA) – NACVA’s specialty designation for litigation valuations.
Chartered Business Valuator (CBV) – Canadian business valuation credential.
Achieving these designations proves extensive valuation knowledge across methodology, best practices, reporting, and professional standards.
For any business leader, getting grounded in core valuation concepts is mission-critical. The time invested upfront pays off exponentially during pivotal moments like fundraising events, shareholder exits, or acquisitions.
Contact CCA Advisors Today to Get a Business Valuation
At CCA Advisors, we understand how critical it is for business owners to know their company’s true market value. For over 35 years, we’ve provided expert valuation services to help owners, attorneys, and private equity firms make informed decisions.
Our experienced team takes a tailored approach to every unique situation. We develop a methodology focused on withstanding legal and regulatory scrutiny. All of our analysts hold AICPA and ABV accounting credentials, ensuring we comply with industry standards.
More importantly, our team uncovers insights directly impacting your company’s value. In one case, discovering discrepancies in clients’ books enabled them to reject an undervalued acquisition offer. We dig deep so you have the clarity to make the right strategic choices.
We know owners don’t want to leave money on the table or make uninformed business decisions. At CCA Advisors, we have the expertise to determine your company’s fair market value, whether for selling, estate planning, settling a dispute, or acquiring a new company.
Contact us for an initial consultation. Our trusted team can provide the valuation clarity you need to confidently move forward. Don’t take chances with your company’s worth — call CCA Advisors today to better understand your business’s true valuation.