A business valuation determines the economic value of a business and can aid in a variety of circumstances. For example: Buying or selling a business, for establishing partner ownership, estate planning and compliance, divorce proceedings, family limited partnerships and ESOPs, etc. McLan Accounting Services LLC provides comprehensive business valuation services that assess the factors that contribute to the value of a business. Regardless of why you seek a business valuation, there are a few key concepts you should understand.
Business Valuation Methodologies
There are several standard business valuation methodologies that you should be familiar with: Intrinsic valuation methods (such as the income approach) and relative valuation methods. The income approach bases the value on projected future earnings of the company, adjusted for any risks, and is an intrinsic valuation method. The market approach looks at comparable businesses to establish the value (sometimes referred to as the relative value approach). Each method has advantages and disadvantages based on some factors. The experts at McLan Accounting Services LLC can help you find the methodology that makes the most sense for establishing the value of your business.
Intrinsic Versus Relative Value
At McLan Accounting Services LLC, we’re skilled with both intrinsic and relative valuation methods and can help you decide which way is appropriate for your positioning. Intrinsic valuation methods (like the income or cash flow method) base the value of your business on projected future cash flow, and then adjusts those future earnings using a Weighted Average Cost of Capital. This approach requires a lot of detail and builds in a lot of assumptions to its calculations. However, it is also considered one of the most accurate business valuation methods. Relative valuation methods are mainly based on comps (comparable), which examine other similar businesses to establish the value of yours. This is another widely used approach because it is based on simple calculations from market value data and standard trading multipliers.
Non-physical – intangible assets – also play a role in business valuations, but can sometimes be more difficult to value. Intangible assets typically involve intellectual property like patents, trademarks, business methodologies, and copyrights, but can also include potentially more subjective concepts like image, brand, and reputation in the marketplace. Just because they aren’t physical assets doesn’t mean they don’t have value, and the intrinsic and relative valuation methods can also be used to calculate the role and importance of any intangible assets in your business. It’s important to assess the value of your intangible assets because they can potentially have a significant impact on the final assessed value of your business.
Keep in mind, nobody values your business as much as you do, and it’s sometimes difficult to reconcile other competing values. McLan Accounting Services LLC offers a full suite of business valuation services to help you navigate these waters. Contact us today to get started.