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Business valuation is an examination conducted towards rendering an estimate or opinion as to the fair market value of a business interest at a given point in time. valuations reflects the entrepreneur’s determination of ownership that may be given in return for the venture firm’s capital and expertise and the venture investor’s determination of the risk and rewards of the investment
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Valuations are needed for a number of reasons such as investment analysis, capital budgeting, merger, acquisition transactions, marital disputes, estate planning, damage claims, buy/sell agreements, purchase/sale of a business interest.
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There are typically three major methods that a business valuation is based on. The income approcah, the asset approach and the market approach.
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The income approach is generally used when valuing small, closely held businesses.When using this approach, you can easily determine the value of a business using one or more methods wherein you convert the anticipated benefits of owning the business. Pretax Profit Corporate Tax After Tax Profit Capitalization Rate Fair Market Value
$ 25,000 - 6,000 19,000 25% $ 76,000
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The most concrete way to earn valuation is by placing dollar values on all assests on a company’s balance sheet and adding them up. There are two kinds of assets. Physical assests including machinery, office furniture, computers, inventories, prototypes and the cost of production.
Equipment $12,000 Furniture 7,000 Inventory 25,000 Fair Market Value of Assets 44,000
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The other kind of asset is intellectual property. This includes patents, trademarks and incorporation papers.
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The size and growth is a factor. The bigger the market, the higher the growth projections, the more the companty is potentially worth.
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Show the investor why there is a huge potential exit value for the company. Maximize the potential exit valuation by removing any doubt or obstacle that the investor perceives as limiting the upside valuation. Undestanding the valuations of other companies at later stages. Identify and understand the gaps between your business and theirs. Then focus the company’s business plan on closing these gaps. Find an invesment competitor.