Over the course of nearly three decades advising successful business owners, our financial advisory team is often asked, "How much is my business worth?" Whether you are considering selling your business or are interested in taking on outside investors, it's crucial for business owners to have an accurate, ongoing valuation of their business.
While there are no fixed formulas to determine the value of every business, the Brown | Miller Wealth Management team has complied several common processes and methods used across the industry to help business owners, like you, get an accurate estimate of how much your business is worth.
But remember, ultimately, your business will always be worth what you are willing to sell it for or what a potential buyer is willing to pay.
Valuation Method #1: Comparable Analysis
One of the most common valuation methods is to take a look at a comparable company that was recently sold or other similar businesses that have known purchasing value. You'll find many resources at annual industry conferences or other events to help discover the selling price of similar companies within your industry.
A common problem with this method is that it often leads to an uneven comparison between companies. Remember that you need to be realistic when comparing your company to others; you can't compare your local business, for instance, with a fortune 500 counterpart.
Valuation Method #2: Asset-Based Valuation
This approach considers your business’s total net asset value, minus the value of its liabilities. There are two ways to approach this method:
For a business that does not have plans to sell its assets in the near future, the going-concern approach should be used when developing an asset-based valuation. The formula involved utilizes your business's current total equity, or assets minus liabilities.1
This approach is based on the assumption that your business is coming to an end and the assets will be liquidated soon. The value of your company's assets will likely be lower than usual, considering the liquidation value usually amounts to be much less than fair market value.
A sort of urgency is utilized with the liquidation value method that other valuation methods typically don't consider.
Valuation Method #3: DCF (Discounted Cash Flow) Analysis
This analysis is an approach in which an analyst will forecast your business's cash flow and discount it at the firm's Weighted Average Cost of Capital (WACC).2 A DCF analysis is performed by creating a financial model and requires an extensive amount of detail. Of the three approaches, this method requires the most assumptions and often produces the highest value. The effort required to prepare a DCF model often results in the most accurate valuation. For larger companies, the DCF value is commonly an over-arching analysis, in which different business units are presented individually and ultimately added together.
Consider a Variety of Methods
Ultimately, your business's value will involve what you are willing to sell it for combined with the current demand for a business like yours in the market. While there are several valuation methods to consider, it's important to keep in mind that there may not be only one solution. Instead, you may want to consider utilizing a combination of business valuation methods in order to set a selling price.
Suppose you're serious about selling your business. In that case, you'll be more likely to maximize enterprise value if you partner with a team of financial professionals who specialize in working with business owners.
If you are preparing to sell your business or would like assistance determining your businesses’ value/selling price, consider contacting your tax, accounting, and legal professionals for guidance on implementing the appropriate valuation approach.
For nearly thirty years, Brown | Miller has worked with business owners, entrepreneurs, and their tax/legal professionals in developing tailored strategies to help them grow, preserve, and protect the cash influx from the sale of a business.
Christopher W. Brown, CFP®, CIMA®
Founder & Managing Principal
Brown | Miller Wealth Management
8280 Greensboro Dr. Suite 220
McLean, VA 22102
This content was developed by Brown | Miller Wealth Management from sources believed to be providing accurate information, and provided to us via Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.