To be valuable, you need to understand valuation
Business value is a term that many of us use several times a day. Above all, we want to increase our business value and we believe our business to be valuable. This is often because our companies are a part of us. To us, they have huge value because we built them from the ground up. Basically, we love our ideas, products, and services.
But this is just our opinion. In fact, there are real processes that evaluators use to measure business value. In the UK, the average business value declined to £90,000 in 2017. Understanding business valuation will be your golden ticket to ensuring your company is as valuable as you think.
What is business valuation?
A business valuation is the process of measuring the economic value of a whole business. We use these valuations when we’re selling our business, in which case we would like to offer a fair price. We also use them to establish partner ownership, for taxation, and also in divorce proceedings. Ultimately, a professional business evaluation provides a measurable figure or value that a company can use as a reference to measure changes or influence decisions.
The valuation process
A business valuation sometimes includes an analysis of the company’s management, capital structure, projected earnings, and the market value of assets. You enlist the help of a professional evaluator, trained to give objective feedback on the value of the business – an outsider’s perspective. The tools they use to come to their conclusions may vary between companies and industries, but might include:
- Market capitalisation – calculated by multiplying share price by the total number of outstanding shares.
- Times revenue method – a stream of revenues generated over a period of time are applied to a multiplier according to the industry and economy.
- Earnings multiplier – adjusts future profits against cash flow.
- Discounted cash flow method – based on estimated future cash flow values taking inflation into account.
- Book value – calculated by subtracting the total liabilities from total assets.
- Liquidation value – the net value of cash a business would receive after liquidation.
Which method your evaluator decides to use will depend on the intended use of the calculations.
If your business has hit a rough patch, or even if it’s exceeding expectations, it’s always a good idea to get a business valuation. You’ll use it for accurate taxing and it can help you make decisions about the next steps forward for your company.
Big Hand is always here to make decision-making clear in your company. Our dedicated staff work to offer you the best advice and our accounting team make sure you never have to worry about your taxes again. For more information, get in touch on 0161 327 2911.