Business valuation is a process that estimates the value of a business and its shares. A business valuation expert must combine knowledge and skills in several disciplines such as accounting, law, and financing. The final result of this process is an estimate of the worth of the company at a certain point in time. There are two types of business valuations: family businesses and publicly listed companies (similar to stocks). Family business valuations are meant for transfer tax purposes, while stock market transactions need public information about share ownership. In order to provide insight into all these different dimensions, there are two stances on how to approach the problem. The “income-based” approach aims to determine the value of a business based on its future cash flows. The “asset-based” approach aims to determine the market price for the assets that are necessary to operate this business. This article focuses mainly on the income-based approach because it is more popular in family businesses and better suited for public companies.
Services offered by a business valuation expert:
Financial Analysis
The business valuation expert has to assess all financial documentation available to him or her, such as balance sheets, profit & loss accounts, and budgets. A thorough analysis will result in an estimate of the company’s current performance and cost structure. Furthermore, ratios like return on capital employed (ROCE) or profit margin helps in determining how healthy or well-run the company is.
Liquidity and solvency
To assess the liquidity and solvency of a company, business valuation experts use ratios like gearing (total debt / total assets), quick ratio (current assets – inventories, receivables, and cash), or current ratio (current liabilities / current assets). The “quick” ratios are especially important as they determine how many days it would take to sell all currently available resources. Furthermore, looking at historical trends in these ratios can provide an insight into possible future financial difficulties that the company may experience.
The estimated value returned by a business valuation expert is based on several factors:
- Past performance: How was performance over time? This can be used to forecast future performance.
- Cost structure: Generally, services provided by professionals are more expensive than those provided by employees because the business valuation expert has higher salaries to pay for these services.
- Structure of industry: There are many different types of industry that vary in terms of size and capital intensity. This will affect to what extent a company can adapt to changes in its external environment. For example, an oil rig installation needs access to large amounts of steel products, drilling mud, and other equipment which require significant capital expenditure (i.e., money invested). The stronger the impact on earnings from periodic fluctuations in prices or costs, the riskier the investment decision considered by investors is.
