Are you a small business owner looking to sell your company? Or, are you considering investing in a small business? Either way, it’s important to understand how company valuations work. To make sound decisions about their business, small business owners need to understand the basics of company valuations.
In this article, we’ll provide an overview of the most common methods used to value a company. By understanding how company valuations are calculated, you’ll be better positioned to negotiate a fair price when selling your business or making an investment.
Continue reading to learn more about the concept of company or business valuations.
The Purpose of a Business Valuation
Business valuations are significant for a number of reasons. As mentioned, a valuation can help small business owners determine the fair market value of their company. This is important information to have if you’re thinking about selling your business.
A valuation can also be helpful if you’re looking to raise capital from investors. By understanding your company’s value, you can ensure that you’re not over- or under-selling it when seeking investment for your small business.
The Approaches Behind a Business Valuation
To reiterate, business valuation is the process of determining the economic value of a business or company. There are a variety of approaches that can be used to determine the value of a business, but some common methods include:
Entry Costs. This valuation method is based on how a potential buyer would be willing to pay an amount equal to the cost of setting up a new business comparable to the target business. This includes costs such as market research, licences and permits, legal fees, and other start-up costs.
- Business Assets. This valuation method is based on a scenario where a potential buyer would be willing to pay an amount equating to the fair market value of the assets of the target business. This typically includes tangible and intangible assets, such as real estate, equipment, inventory, patents, and goodwill.
- Price-to-Earnings Ratio. The price-to-earnings ratio is a common valuation method based on the premise that a potential buyer would be willing to pay up to an amount that’s equal to the earnings of the target business. Investors often use this method as it provides a relatively easy way to compare companies across different industries.
- Discounted Cash Flow. The DCF method is another popular valuation technique that can be used to estimate a company’s intrinsic value. This approach discounts future cash flows of a business back to their present value, using an appropriate discount rate. This technique can be used to value both public and private companies.
Small business owners need to have a basic understanding of company valuations. This will allow them to create informed decisions regarding selling or investing in their businesses. It’s important to partner up and work with a qualified accountant when valuing your business. With their knowledge and experience, they will be able to take all of these factors into account in order to come up with an accurate estimate.
Need a small business valuation? Fiander Tovell accountants in Southampton work with a wide range of private individuals and businesses of all ages, sizes, sectors and structures in the UK. Get in touch with us today!