Let’s Discuss Business Valuation

If you are self-employed or own a company, you need to be familiar with business valuations. Many business owners believe they only need a business valuation if they sell, although other situations also demand this report. Divorce, litigation, lost income or wages due to injury, estate planning and many other life events often demand the expertise of an experienced business valuation professional in San Francisco, CA. Here are the common questions about this process and how to prepare for one.

What is a business valuation?

A business valuation is a process that determines the economic value of your self-employment venture or entity. It is an in-depth look into your profit capabilities and assets.

What comprises company value?

A business valuation professional will explain this in more detail in a consultation, but generally speaking, your valuation is based on standards of value, including fair market value and fair value.

Fair market value is the price your assets will obtain in an open marketplace. This would be the likely price that you could secure if you sold your business and its assets. For example, if you are selling a restaurant, the fair market value arises from the value of the building, capital like ovens and cooking supplies and profitability—all items a potential buyer considers.

Fair value reflects investment value. This looks deeper into regular clientele and good will in the community. To return to our restaurant example, a business that is consistently busy most nights and has experienced employees and regular customers is a better investment than a restaurant that barely stays afloat or has bad Yelp reviews. While there is some focus on viability in fair market value, this is a larger element in fair value.

What documents do I need to provide for a business valuation?

If you hire us for a business valuation in San Francisco, CA, prepare to provide the following documents:

  • Historic financial statements
  • Tax returns
  • Customer lists or reports showing the number of sales within specified time periods
  • Vendor lists
  • Business formation documents like Articles of Incorporation
  • Depreciation schedules
  • Current profit/loss statements

What can I expect from my business valuation?

The business valuation includes industry and economic analyses and a comprehensive analysis of the company. Your assigned professional will look at your business using the income, market and asset approach.

The income approach addresses cash flow. Depending on your business, your evaluator may use the capitalized cash flow method, discounted cash flow method or capitalized excess earnings method. Business evaluators use professional judgment to determine the best method for your business model.

The market approach only applies to publicly traded companies. On this standard, privately held companies are not marketable in the same way as public entities. If your company is privately held, your valuation professional will likely apply a discount to the calculated value of your business to account for its lack of public marketability.

The asset approach values your business assets and is most often used when valuing a business with large amounts of equipment, real estate or other assets. This value can often cancel out any deductions in value that result from being privately traded.

Now that you know what business valuation is, you may find you are in a situation that requires one. Medina & Company Consulting, Inc. is a business valuation professional in the San Francisco, CA area. Call us today to schedule a consultation.