Business valuation is an important part of M&A advisory services. This is because buyers want to know exactly how much a business is valued by the market while sellers want to sell their businesses for what it’s truly worth. Numerous methods of business valuation exist, so every entrepreneur needs to be aware of these methods to ensure they can make decisions that are informed. Please note that different valuation methods may produce different results. Some methods may also be best suited for certain businesses and not others. An M&A firm can easily identify the most suitable method of business valuation for the client. Keep reading to learn about the mystique of business valuation for privately held companies.
Popular Business Valuation Methods
- Liquidation Value
This method looks at the difference between the assets and liabilities of a business. In case of liquidation, how much money will be left once all the debts and other liabilities have been settled? The difference is the value of the business. This method is best suited for businesses that have tangible assets, such as equipment, vehicles, furniture and fittings, plant, machinery, and inventory among other things. However, it is not suited for companies with little or no tangible assets, such as software companies.
- Book Value
The book value method has a lot of similarities with the liquidation method as it gives a business a market value similar to the difference between the assets and liabilities of the company. However, unlike the liquidation method, assets are not sold to offset the liabilities. Instead, a valuation of all the assets is done. Next, the liabilities are calculated and subtracted from the value of the assets. The difference is the book value of the business.
- Earnings Multiplier
The simplest method of valuing a company is the earnings multiplier method. In this method, the price-to-earnings ratio (P/E) is adjusted to take into consideration the prevailing interest rates. The method adjusts future profits against cash flow invested at the prevailing interest rate for the same period.
- Market Cap Method
A company must have a specific number of shares with a given valuation. For instance, a company with 10,000 shares valued at $10 each has a market capitalization of $100,000. However, if 10% of company shares have been sold for $50,000, the new valuation of the company will rise to $500,000. The market cap method looks at the current price per share. It is an accurate method of valuing companies with few assets.
- Revenue Multiplier Method
The revenue generated by a business over the last year is an accurate reflection of its value. In this method, the value of a business is calculated by multiplying the average annual revenue by a given factor, of say 3, 5, or 10. If you own a tech company, the most suitable multiplier is 3. This means that if the revenue generated in the previous year is $100,000, the company can be valued at $300,000. In the case of a service business, the multiplication factor is usually less than 1. For instance, a service business can be valued at 0.5 times the revenue.
About MergersCorp M&A International
Buying or selling a business is not a simple process. The transfer of ownership is a legal process that should only be undertaken with the help of professionals. MergersCorp M&A International specializes in helping clients find suitable businesses for sale. The company also helps investors find viable businesses for sale. Whether you want to sell or buy a business, MergersCorp M&A International can help you a great deal.
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