What You Should Know About Business Valuation
March 1, 2023
Determining the value of a business is often required to help you make informed decisions before acquiring or buying a business. In addition, a business valuation can reveal the actual economic value of your business, which may be vital information for estate planning, asset division in a divorce, succession planning, or attracting more investors. However, there are different methods and factors that are usually considered when assigning value to a business.
At DeChello Law Firm LLC, we are committed to assisting and guiding business owners through the complex procedures involved in business valuation. Our Connecticut business law attorneys can enlighten you about how business valuation works and the various methods, as well as walk you through the legal processes involved. We proudly serve clients in North Haven and throughout North Haven County, Connecticut.
What Is a Business Valuation?
Business valuation can be described as the process of determining the economic or market value of a business and its assets. Generally, the business valuation may be required to determine sale or purchase value, attract investors, establish mergers, estate planning, or for property division in a divorce.
Methods of Valuation
Determining the fair economic value of a business requires evaluating the business assets, such as property, inventory, revenue, and equipment, then subtracting any taxes, liabilities, or debts. The following are some of the available methods of business valuation:
Market Value Valuation Method
Market value valuation remains the most subjective approach to determining the economic value of a business. It involves assigning a certain value to your company using the industry or market standards or by comparing it to similar businesses sold recently.
Asset-Based Valuation Method
In addition, you can determine the market value of your business by evaluating the company's assets. Here, you will consider your tangible and intangible assets to assign a specific value to the business.
Tangible assets include property, vehicles, equipment, inventory, cash, and investments. Intangible assets include intellectual property, patents, trade secrets, and copyrights. Once you obtain the total asset value, you must deduct total liabilities to achieve the net value.
Income Valuation Method
Also, you can determine the market value of a company through the company's earnings or income. This requires assigning a value to the company with its present value and potential earnings. You can consider the income statement on your company's annual tax returns for the business valuation.
Return on Investment (ROI)-Based Valuation Method
In the ROI-based valuation method, you will determine the value of your business through the profit and the return on investment that a potential investor might earn for investing or buying into the company.
Discounted Cash Flow (DCF) Valuation Method
The DCF valuation method uses your company's financial records to arrive at a more accurate valuation of the business. It will calculate the present value of your business based on your projected cash flow while taking inflation into consideration.
Earning Multiplier Valuation Method
The earning multiplier valuation method involves determining the market value of your business using its potential to earn in the future. It will adjust future profits of the business against cash flow. However, earnings multiplier may vary according to your industry, location, or economic climate.
Book Value Valuation Method
The book value valuation method involves calculating the value of your business at a particular period using your balance sheet. This will also calculate your equity (total assets minus liabilities) to achieve the market value of your business.
Consult an Experienced Attorney
However, when determining your business's market value, working with professionals, such as business lawyers, appraisers, brokers, and forensic accountants, is crucial for detailed guidance. Your team of professionals can:
Help organize and review your financial data and tax returns,
Evaluate the value of your business assets, and
Track down other crucial information or documentation that can assist with the business valuation.
Business valuation in Connecticut usually involves a lot of complicated processes. This is why working with an experienced business attorney is imperative for detailed guidance and to help you make intelligent decisions at every step. At DeChello Law Firm LLC, we have the diligence and resources to advise and guide clients in business valuation-related matters.
Contact us at DeChello Law Firm LLC in New Haven, Connecticut, today to schedule a simple consultation with seasoned business law attorneys. Our skilled lawyers can offer you the personalized legal counsel and advocacy you need to make informed decisions in your business valuation.