May 19, 2024
Valuation of your business is highly inevitable when you are holding an investment or sales dialogue. At Scalex Solutions, our Marketing and Sales Consulting Services will enable you to accurately appraise what is the value of your business, and that is an essential factor when communicating with banks, buyers, or stakeholders.
Moreover, the case of business valuation done correctly is highly demanded when shares or percentages of your firm or company are in place to be sold. It not only creates the right price but also contributes to the rallying of attention and interest among potential investors and buyers. To this end, our specialized B2B Sales Consulting and Marketing and Sales Consulting Services services will ensure that your business’s value is demonstrated, making it easier for investors to decide on a reasonable investment amount.
Our Scalex Solutions sales consultants are well-informed about the need to put forward a well-supported valuation. Consequently, this is exactly what we are here for–to assist you in the process, ensuring the valuation of your company attains perfection.
Read on to discover the essential steps and expert guide to ensure you sell your company at the perfect valuation.
How to calculate your Business valuation
At Scalex Solutions, every component of your business, be it through Marketing and Sales Consulting Services, or B2B Sales Consulting, is carefully analyzed to perfectly achieve the optimum valuation. That said, while you can certainly get help from our specialized services, here are some preliminary steps you can follow by yourself:
Step 1: The valuation of your business should not be done based based on Capital Assets.
The one major mistake made by many people is equating asset value with business value. They are not anyhow related to each other. Business valuation is assessed based on the cash flow of your business and not the value of the physical assets. As a result, it only involves evaluating the profit that belongs to business owners. The buyers are more likely to go for your products and services which generate potential income than for your property, irrespective of the resale value.
Step 2: Always know your profitability margins by working out gross income and all outgoing payments.
Do bear in mind that for any business it is its profitability that determines the whole point of its value. First, check your net income, which is your gross profit minus all expenses. While calculating net income, include your base operating wage, but not every cent you earn from the business. Why I say so because the prospective buyer would want to know what profitability the business would have if they were to take it over you.
Nonetheless, from our standpoint as a sales consultant, we think that the valuation of a business also covers more than one year’s income. For this, we must also consider:
Multiples: Due to the variable and several industry-specific factors that affect valuation.
Profitability adjustments: Recalculating profits toward an accurate depiction.
Valuation Using Multiples:
This method is one of three main approaches to the valuation of a venture which is implemented mostly by the name of the ‘market-based approach’. It constitutes an idea that identical enterprises or assets should have the same valuation. In this regard, to evaluate a company’s value, Marketing and Sales Consulting Services analyzes financial data from other concerns, and applies a financial ratio. This ratio can be applied if there is at least some evidence that it reflects the valuation of peer companies. Consequently, purely assessing with multiples (financial ratio) is widely supported because of its simple and easy approach.
Two Different Methods of Valuation Using Multiples
In general, two methods of multiples are used for valuation.
Comparable Company Analysis (CCA)
One is what is termed comparable company analysis (CCA), also called comps. In this situation, you will ask how a given firm is valued in relation to its peers by these ratios. Such multiples, which can be computed from financial statements of publicly traded companies, could be found in public sources.
Comparable Transaction Analysis
However, the precedent transaction analysis, more known as a “precedents” or comparables transaction analysis (CTA), is more complicated, due to the inadequate amount of publically available data on previous transactions. Identifying comparable firms for the financial analysis, therefore, requires a thorough scan through transaction records involving businesses similar to the one being analyzed.
Profitability Adjustments:
However, it should be noted that at ScaleX Solutions, alongside Marketing and Sales Consulting Services, the incorporation of the normalization process in the sale of the business is also one of our areas of expertise. Normalization crucially demonstrates the clarity of the profitability or cash-generating capacity of the company as it is.
A business’s accounts might not be a true representation of the company’s value if there is no normalization–where the personal or highly inflated expenses are incorporated in the financial statements.
What Adjustments are Made During Normalization?
Several alterations are usually made while performing the normalization procedure to facilitate the valuation of a business and to ensure a true representation of the operating cash flows.
Some of the most prevalent adjustments include:
Related Party Transactions
This mainly includes the rent or lease of real estate from a business owner.
Discretionary Expenses
These expenses include everything related to entertainment, travel, charity, and the cost of interest of the main shareholder.
Owner’s Compensation
Professional valuators typically include a salary adjustment, being the last item considered during the valuation process. This is significant because too much of the management’s salaries may squeeze the profits and cash flow of the businesses.
Understanding Your Business’s True Value:
Finally, it is important to note that Calculating the value of your business includes various variables, each of which is directly connected to the final worth of the business. Among these, two key factors stand out:
Consider Multiples
Knowing the dynamics behind multiples cannot be overemphasized. The higher the risk and the smaller the business, the multiple the firm can impose will be lower as well. As a part of your different multiple calculations might require some guesswork and subjectivity, without a doubt it is a key aspect of assessment.
Factor in Market Valuation
Your calculated valuation serves as a guide, providing investors and buyers with a reasonable estimation of your business’s worth. Nevertheless, the inherent value of your business will be referred to the market. The market value presents the coincidental valuation of all investors and information that is available, increasing its reliability as a true estimation.
Bearing in mind this, contact Scalex Solutions now to utilize our expertise and arrive at the perfect valuation for your business. Whatever your investment attracting or sale negotiating goal is, we will be by your side with advice at every stage. Click here to know more.
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