Valuation Methods for Your Business

Some small business owners hardly ever need to have their companies assessed by a professional valuator. Others, like those in emerging or high-growth industries, might regularly engage with business professionals to determine the value of their enterprise. 

Situations that call for a business valuation include: 

  • Selling a business;
  • Buying out a fellow owner’s interests in the company;
  • Taking on significant outside funding;
  • A potential IPO;
  • Asking for a loan; and
  • Succession planning.

There are multiple ways to place a monetary value on your business. One of the main reasons there are multiple valuation methods is that owners often want to highlight different parts of their companies. A business with lots of assets would be better suited to a different valuation method than a lean operation poised for explosive growth. Below, Integrated General Counsel takes a look at some commonly used approaches to business valuation.

Discounted Cash Flow Method

If you’re trying to highlight the return on investment (ROI) for an investment executed now, the DCF method is one you should strongly consider. The DCF method aims to show how an investment will pay off in cash. After determining the future cash flow of your company, you will need to discount that value by applying the Weighted Average Cost of Capital calculation. The DCF method is often used by business owners expecting a substantial change in future cash flow. 

Net Asset Method

This method involves taking the book values of your company’s tangible and intangible assets and subtracting its liabilities. Most of the time, using an asset-based approach to business valuation requires some amount of adjustment before presenting to a third party. For instance, while your accounts receivable are on the books as assets, it’s highly unlikely you will collect the full amount. An asset-based valuation method is often used for established companies that have experienced stagnation or downturn in revenue. 

Market-Based Method

The relative or market-based valuation method involves looking at recent sales of similar companies. This can be tricky due to the difficulty of finding comprehensive information on the sales of closely held businesses. Comparisons to nearby businesses are often helpful, but the most important thing is to find transactions in the same industry as your business.

Determining Which Method to Use

Within the three overarching types of valuation methods discussed in this blog, there are countless ways to adjust figures to present your business in the best possible light. The team at Integrated General Counsel has a wealth of experience helping owners navigate the business valuation process. Call IGC at (925) 399-1529 to learn how we can help handle the legal considerations and assist you in reaching your entrepreneurial goals.