Business Valuations

What is business valuation?

Business valuation is a process that aims to estimate the economic worth of a company or a business. There are many ways to value a business, with each method having its advantages and disadvantages. In addition, buyers and sellers are seldom in agreement when it comes to how much a business is worth. They often need an independent due diligence expert like Blackhawk Intelligence to provide an honest and more complete picture of a business’s value and speed up negotiation.

When do you need a business valuation?

There are many reasons why you would want to know the value of a business. The needs to value a business may occur when you are:

• Attracting investors
• Buying a business
• Merging with another company
• Selling a business
• Selling shares of a private company
• Valuing shares for tax purposes
• Valuing your own net worth
• Going through personal disputes, matrimonial proceedings, among others

What information is used in a business valuation?

History of the business

Find out how long the business has been operating, what is its reputation, and if its goals have changed along the way.

Financial information

Review present and historical financial statements, including but not limited to working capital, cash flow data, annual turnover, tangible assets and the market value of these assets today, as well as the book value of the stock.

Goodwill & intangible assets

Identify intellectual property and copyrights, along with their transferability to a new owner. Brand recognition is also a valuable intangible asset.

Management & staff

Find out who are the key people and if the business is over-reliant on them. Review skill sets of key people, specialist requirements to run the business, job descriptions of all staff, employment contracts, pay scales and benefits, organisation culture and staff morale.

Legal & commercial information

Check if the business is involved in any current or pending legal proceedings, and if it is meeting all regulatory compliance – necessary licenses, permits, health and safety laws. Analyse commercial information such as long-term contracts.

Competition

Analyse the company’s market share, who are their competitors, and the market price of a similar business.

Market information & future outlook

Review the short-term and long-term industry outlook, how the departure of the current owner/ key people could impact the outlook, and what specific economic factors could directly affect the business.

Circumstances surrounding the valuation

The purpose of the valuation could impact the final value. For example, if you are looking for a quick exit due to a change in your circumstances, then you may consider selling the business for less than its perceived value to speed up the process.

Business valuation methods

There are many business valuation methods and no one method is more credible than another, which is why most companies use a combination of methods.

A few common valuation methods are:

Book value

The book value valuation method is simple but not without flaws. It focuses entirely on the balance sheet, plus the value of assets minus the total of liabilities. Sometimes it may include liquid value – net cash gained if all assets are liquidated and paid off. The book value method doesn’t consider a company’s legal & commercial information, nor its management and staff.

Earnings multiples

The earnings multiples method is based on a company’s annual net profit multiplied by a value which the marketplace may use. For example, if you’re in a sector which the standard valuation is three times net profit, and if your net profit is a million, your valuation will be three million. This method doesn’t consider other factors such as an increasing or decreasing target market.

Discounted cash flow

The discounted cash flow method is used to determine the projected performance of the company and the potential value of the company after a certain period. This method requires a discount rate that considers the time value of money – which assumes your money will worth more today than in the future. If a company’s future cash flows are highly predictable (based on historical data and market trends), then the valuation of the company will tend to be higher too.