When you’re preparing to sell your company, to buy a company, to merge two companies, or to perform a similar activity, it’s essential to get an accurate company valuation. Otherwise, the final results of the transaction could be unfavorable for you and unfair to others.
In a large transaction, the difference between an accurate and inaccurate valuation can represent significant capital gains or losses. Sometimes, shareholders and other stakeholders that are dissatisfied with the results can take you to court over them.
Here are some steps to finding value of your company, however, when it comes to an important business decision, you’ll want an outside advisory expert to perform the business valuation; for example, you may be merging with another company and need an objective valuation of both firms.
Gather all available financial and operational data about the company. Note any non-financial information that might make it more attractive and thus more valuable, including factors like the company being extremely well-organized, having a diverse customer base, or earning above-average revenue compared to others in their industry.
2. Evaluate 3-5 Years of Financial Data
Analyze three to five years of the company’s balance sheets and income statements. Adjust them to fit your own valuation standards, rather the form the company uses. For example, businesses often list the cost-basis value of each of their assets for tax purposes, whereas you could instead list the time-depreciated cost to replace each asset.
3. Choose Between Valuation Approaches
Why do you need to value a company? Your answer will determine which method of valuation listed below matters most to you.
For example, if you need to sell off your own company to pay debts, you may want to simply add up the value of saleable assets. If you’re buying a company as an investment, though, you might instead calculate its market value and its potential for future income.
Analyze the sales of companies that are comparable to the company you’re valuing. There is a lot of data available about the sale of public companies, but you can also find data about the sale of private companies. Analyze your subject company well enough to ensure that the comparable companies are truly similar to it and are therefore good measures of its value.
You’ll need to have the expertise to be able to accurately value every single asset and liability of the company, which can be fairly complex in a company that has many of each. You should also consider business goodwill and excess earnings as assets to find the fairest value.
Some companies are best valued as a multiple of their earnings. The size of the multiplier depends on the industry they’re in, the age of the company, the reliability of the income stream, and other factors. This method is useful for evaluating a company as an investment with an expected yearly rate of return.
4. Run the Numbers
When you’re confident you have gathered all the necessary information, you can finish running your calculations and arrive at an answer.
You may use two or three of the methods of valuation from step 3 and compare their results. You can choose the result that seems most accurate or take a weighted average of the results. If there are large discrepancies between the results of each method, it may be a red flag that you haven’t gathered enough information and need to go through these steps again.
Perform Your Own Valuation or Hire an Advisory Service?
If you need a quick or simple valuation and have the internal expertise to perform it, you may be able to run through these steps and get a usable valuation on your own. If you need an objective, outside company valuation or want to protect your firm from charges of unfair valuation, consider a corporate advisory service.