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| Business Valuations |
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There are many reasons for valuing your business. It may be for verification purposes for investors or lenders, preparation for a reorganization or even a measurement of capital gains or losses. There are many ways to value a business. The right methodology will depend on the actual purpose of the valuation. If the reason is to establish a value for your business for the purpose of either selling your business or merging it together with another business, or maybe you are requiring the value of a business that you wish to acquire, here are some of the methods to use:
Asset Valuation
Use this formula when the company is asset-intensive. Although another formula might result in a lower figure, the target company's adviser will insist that a valuation of the assets be taken into account. To compute an asset valuation, add the market value of the fixed assets and equipment to the value of the leasehold improvements. Next add the wholesale value of the inventory. This should include the value of the raw materials, work-in-process and finished goods. To this total, add the owner's annual discretionary cash, that is, the net profit plus all expenses that were paid that directly benefit the owner, (i.e. car lease, etc.). The Grand Total of these items will be the Total Asset Valuation. |
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Capitalization of Income Valuation
Unlike the asset formula, this method places no value on the equipment or the fixed assets. It is assumed that they have no value other than the ability to produce income for the company. Service companies often fall into this category. This valuation method does acknowledge the business's intangible or goodwill value. To place a value on this some subjectivity is unavoidable. By adding it to the available cash flow, a valuation can be pegged. Take the twelve most critical aspects of a business and place a score of zero to five next to each of them:
- The owner's reason for selling
- Length of time that the business has been in operation
- Length of time that the owner has owned the business
- Degree of business risk
- Profitability
- Business location
- Growth history
- Competition
- Entry barriers
- Future potential for the industry
- Customer base
- Technology
Total the figures and divide by twelve. The resulting figure is the multiplier that plugs into the capitalization rate formula. Next take the owner's benefit and multiply it by 75%. The result is the owner's discretionary cash, which is after debt servicing. The final step is to multiply the owner's discretionary cash by the capitalization rate multiplier.
These are just two of the many valuation models that can be used to value a business. The most prudent method is to use several different models (at least three) so as to triangulate on a valuation figure. Alterigo Corporate Finance Partners, LLC can assist you in valuing either your business or a company that you have targeted for acquisition.
BUSINESS PLANS OR EXECUTIVE SUMMARIES
We are always looking for new investment prospects. If you feel you have an opportunity that would fit with Alterigo´s approach and strategy, please submit a business plan or executive summary to the below address or electronically.
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