01 Jun The Value of Business Valuations
Business valuations are a critical part of the business-buying process, yet many people don’t know what this important calculation really means.
At A R Business Brokers, we want our clients to have a clear understanding of the steps required to buy a business. In this blog, we offer you a high-level overview of business valuations to help you better understand their importance.
What is a business valuation?
A business valuation is the process of figuring out the fair market value of a business. This process includes reviewing:
- The sale value
- The financial statements
- Any debts or loans
- Partner or ownership details (if appropriate)
- Asset values
- Market values
- Future earning values
- Non-competition clauses (for franchises)
- And more
We advise our clients to work with experts to conduct their business valuations. We have third-party professionals that we can recommend.
Business Valuation Calculations
There is no set-in-stone science behind business valuation calculations, as every business has different assumptions and financial considerations. However, there are some basic factors(often called multiples) that every valuation incorporates.
An example of a valuation calculation would include determining:
- The annual earnings before interest, taxes, depreciation, & amortization (EBITDA).
- The compensation paid to the owners (if applicable).
- The anticipated rate of earnings (growth).
- The number of years that earnings are expected.
- The level of risk associated with the business — this can include business risk, industry risk, and financial risk.
Other calculations may include:
- An earnings multiple to determine the annual profits.
- Comparable sales to determine the selling price.
- Asset valuations to determine what the businesses assets may be worth.
In the end, the purpose of these calculations is to help you to understand what the business is worth, so that you can feel confident that you are paying the appropriate purchase price. You want to be sure that you are buying a business with the potential for success.
To learn more about business valuations, or to get assistance with your next valuation, contact A R Business Brokers. We’ll help you work out it all out.