How does a Valuator Value a Business?

As a business owner, there may be different reasons why you might be interested in knowing how much your business is worth. You may be thinking of selling it, or maybe you have a new partner interested in buying into the business. You may need to know for tax purposes or to plan a succession, or simply because you want to understand how much your company has prospered and grown. Whatever the reason, A Neumann & Associates, LLC knows that you want to work with a professional firm that can give you the most accurate valuation for your company. Here is how a valuator can help you get the information you need.

What does a Business Valuator Do?

When you work with a business valuator, you must know that they will analyze all areas of your business to determine their worth. Among the areas analyzed, the valuator will look at the company’s management, its capital structure, its prospects for future earnings, and the market value of its assets, among other aspects.

To conduct their business, a valuator will use several tools, depending on the size of the business and the type of industry the business is in. Using different approaches, such as a review of financial statements, a comparison with similar companies, or a discounted cash flow model, they are able to place a value on the company.

What are the Most Common Valuation Methods?

There are several ways through which a company can be valued. Here are the most common ones.

Market Capitalization

This is the simplest method to value a business. It works by multiplying the company’s share price by the total number of shares outstanding.

Times Revenue Method

Under this valuation method, a stream of revenues over a certain period of time is applied to a multiplier. The multiplier depends on the industry your business is in and the economic environment. It is usual for a tech company to be valued at 3x revenue, while a firm that provides services may be valued at 0.5x revenue.

Earnings Multiplier

There are those who believe that this method provides a more accurate picture of the real value of a business since its profits are a better indicator of its financial picture than its sales revenue. This method adjusts the current P/E ratio to account for today’s interest rates.

Discounted Cash Flow

Similar to the earnings multiplier method, the DCF method is based on projections of future cash flows, adjusting them to get the current market value of the enterprise. It is different because it considers inflation to calculate the business’ present value.

Book Value

A business’ book value is obtained by subtracting the business’s total liabilities from its total assets. It is the value that is shown on the balance sheet statement.

Liquidation

This is the amount the business would receive if all its assets were to be liquidated today and all liabilities paid off.