What is a Business Value?
Business valuation is the general process of determining a company’s economic value. A business valuation is used to determine the fair market value of a company for many reasons. These include sale value, taxation, establishing partner ownership, taxation, or even divorce proceedings. Business owners often use professional business evaluators to objectively assess the business’s value.
The basics of business valuation
Corporate finance is a frequent topic that deals with business valuation. A company may need to value its business if it plans to sell all or part of its operations or merge with another company. Valuing a business involves determining its current value using objective measures and evaluating all aspects.
A business valuation may include an assessment of the company’s management, capital structure, future earnings prospects, or market value of its assets. Many tools can value a company, business, or industry. A review of financial statements discounted cash flow models, and comparisons between similar companies are common approaches to business valuation.
Tax reporting requires that you also value your business. The Internal Revenue Service (IRS) requires that businesses are valued based on fair market value. Taxes will be assessed on certain tax-related events, such as the sale, purchase, or gifting of shares in a company.
Particular Considerations: Valuation Methods
There are many ways that a company could be valued. Below are some of the methods.
1. Market Capitalization
Market capitalization is the most straightforward method for business valuation. This is done by adding the company’s share price to its total outstanding shares. Microsoft Inc. was trading at $86.35.2 as of January 3, 2018. With 7.715 Billion shares outstanding, it could be valued at $86.35 x 7.715 Billion = $666.19.
2. Times Revenue Method
The time’s revenue business valuation method uses a stream of revenues generated over time to calculate a multiplier. This multiplier is dependent on the industry and the economic environment. A tech company might be valued at 3x revenue, while a service business may be valued at 0.5x.
3. Multiplier Earnings
The earnings multiplier can be used instead of the times revenue method to better understand a company’s actual value. Profits are a more reliable indicator than sales revenue. The earnings multiplier is a way to adjust future profits for cash flow that could have been invested at the current rate over the same period. It adjusts the current ratio of P/E to reflect current interest rates.
4. Method of Discounted Cash Flow (DCF).
The DCF method for business valuation is very similar to the earnings multiplier. This method uses projections of future cash flow, which are adjusted to determine the company’s current market value. The difference between the discount cash flow method and the profit multiplier is that it considers inflation to calculate the current value.
5. Book Value
This is the shareholder equity a business has as indicated on its balance sheet statement. This is calculated by subtracting the total liabilities from the company’s total assets to calculate its book value.
6. Liquidation Value
The liquidation value of a business is the amount of net cash it will receive if its assets are sold, and its liabilities are paid today.
This is not a complete list of all the current business valuation methods. You can also use asset-based or replacement value to determine your business’s value.
Accreditation in Business Valuation
Accredited in Business Value (ABV) in the United States is a professional designation that accountants, such as CPAs, who are skilled in calculating the business value, receive. American Institute of Certified Public Accountants oversees the ABV certification. Candidates must complete an application, pass an exam, satisfy minimum Business Experience and Education requirements3, and pay a credential fee (as of March). The annual fee for ABV Credential was $380 as of March 11, 2022.
ABV certification holders must also meet minimum requirements for work experience and lifelong education to maintain their ABV credential. The ABV designation can be used with the names of successful applicants, increasing job opportunities, professional reputation, and pay. The Canadian Institute of Chartered Business Valuators (CBV) is a designation that recognizes business valuation experts. The Canadian Institute of Chartered Business Valuators offers it.