17 Feb Considerations When Valuing a Business
The time has come to sell your business. Before you do so, you will certainly need to know the value of the company. There are a number of considerations incident to selling your business that need to be considered prior to computing and settling on a value which you can charge for your company.
Does your company own or operate commercial real estate? Are there other important assets inherent to the operation of the business? These assets could include machinery, intellectual property or important personnel.
Such assets are generally gauged by the book value less any accumulated depreciation. If assets are included in the business sale, they will be included in the valuation of the business.
Cash flows, generally calculated on a monthly basis are perhaps the most important factor when valuing a business. The cash flows a business produces, generally calculated on a monthly recurring basis, are used to calculate the net present value of your business.
The regularly expected incoming cash flows are perhaps the most important aspect of your business which you may be looking to sell. If you expect to have consistent year-on-year flows coming in every month, it is easier to get a higher value for your business. This is where value is gained. Like Warren Buffett says, “price is what you pay, value is what you get.”
How you value your free cash flows is done using the rate of return you intend to use for your company. Obtaining a proper discount rate is calculated using the beta of your firm and the weighted average cost of capital. The discount rate can be a very subjective thing to determine, especially when you are valuing the cash flows of a privately-held business with no stocks and no automatically calculated beta, sometimes choosing an appropriate discount rate can be subjective.
Finding and using a discount rate when calculating the NPV is very important when it comes time gaining the net present value (NPV) of your company.
Often some publicly-traded enterprises will, in mine and many others’ opinions, overpay for a company because of potential. This is often known as “goodwill.” After a business has been valued for its general assets, including cash and the cash flows the company must account for the excess that was paid for the company they purchased.
Goodwill is written down on the books of the purchasing company. The privately-held company who is able to receive a large amount of goodwill when selling their company is lucky. Many times this does not happen unless there is some significant reason to be believe.