Have you ever asked yourself how much your company is worthy? How would you put a value to it? Today we explore business valuation from the business advisory side. Business Valuation refers to the process of determining the economic value or worth of a business, which involves assessing the financial health and the potential of a company. Therefore, we will explore business valuations for Small and Medium-sized Enterprises(SMEs).
How to perform business valuation:
Step 1: Gather Financial Information
Collect financial statements, that is, income statements and balance sheets and summarize the key financial indicators such as revenue, expenses, and assets.
Step 2: Determine the Purpose of Valuation
Define why you need the valuation for example you may need it before a sale of the business, seeking investment or internal planning.
Step 3: Choose a Valuation Method
For SMEs, the common methods used are
- The Market Approach
Is a valuation method that looks at the business being valued in comparison to other similar businesses in the market in terms of products and services they offer.
- The Earnings Multiplier Method
The Earnings Multiplier Method is a method used to compare a company’s current share price to its earnings per share (EPS). That means, It is a way to look at how much a company is worth through how much money it makes (earnings) and how much people are willing to pay for other companies that make a similar amount of money.
There are a number of ratios used to calculate the valuation, but the common ones are:
- Price Earnings Ratio – is the relationship between a company’s stock price and earnings per share (EPS). It shows the expectations of the market and is the price you must pay per unit of current earnings (or future earnings, as the case may be).
- EBITDA multiple – is a ratio that compares a company’s Enterprise Value (EV) to its Earnings Before Interest, Taxes, Depreciation & Amortization (EBITDA).
Step 4: Adjust evaluation method to suit SMEs
Consider factors unique to SMEs, like the owner’s involvement, customer concentration, and local market conditions, and make necessary adjustments to the valuation model.
Step 5: Calculate the Value
Apply the chosen valuation method and any adjustments to arrive at the estimated business value.
Step 6: Validate and Review
Have your valuation reviewed by our team of professionals to ensure accuracy and objectivity. We treat every business we partner with as our own and navigate obstacles together until we win.
Step 7: Document and Communicate
- Prepare a clear and concise valuation report that outlines the methods used, assumptions made, and the final value.
- Communicate the results to relevant stakeholders, like potential buyers or investors.
PROFESSIONAL TIPS:
- Regularly review and update the valuation when significant changes occur in the business or market.
- Ensure that the financial data used in the valuation is accurate, complete, and up-to-date.
- Be alert to any pending or potential legal or regulatory issues that could affect the business.
- Customer concentration is key. If a significant portion of revenue comes from a small number of clients, this can pose a risk and affect the valuation.
Remember, while these steps and tips can provide a reasonable estimate of your SME’s value, it’s often a good idea to consult with us, especially for important financial decisions or when dealing with potential buyers or investors.