3 Things Executives Should Know About Business Valuations

Performing occasional business valuations helps ensure you fully understand the value of your stake in any enterprise. Business valuations are routinely done before a company changes hands or issues stock, but they can also be part of estate planning and investment management.

Business valuations are more complex than they might appear at first, so it’s crucial to go into the process with an informed mindset. Even the most savvy and successful business person does not necessarily know all of the pitfalls and setbacks that can occur during a valuation.

The most efficient and accurate business valuations are performed by business finance experts.

As the shareholder, however, it’s a good idea to be familiar with a few of the key details.

Let’s look at some things you should know for a truly successful valuation:

1. Valuation Methods Influence Outcomes
There are three main business valuation methods:

• Asset-Based: Totals the value (or net cash sales value) of all assets minus all liabilities.
• Earning Value: Measures and normalizes anticipated cash flow based on prior earnings.
• Market Value: Compares the business to similar businesses that have been sold recently.

Each of the three categories offers several approaches, allowing you to get the most accurate valuation for your specific situation. For example, market value valuation is not a good fit for specialized enterprises without many comparable sales to benchmark against.

The Earning Value approach is appropriate for most businesses, but may not be the best choice.

Before a valuation begins, speaking to an accounting expert about methodology is crucial. This will allow you to gather any documentation or other information you might need to bring the process to a swift and accurate conclusion – one you can build long-term financial plans on!

2. Non-Compete Agreements Can Impact Valuation
Non-compete clauses are used frequently in software development and other high-tech fields. No matter what industry your business is in, however, you can consider an NCA to help you shore up the medium-term prospects of an already successful business.

NCAs can solidify a company’s position by ensuring similar products and services will not enter the market and compete for the same customers within a defined period. However, it’s vital to begin work on NCAs as soon as possible – they can take a long time for a lawyer to develop.

3. Franchises Require Special Consideration
Franchises cannot always be valued according to standard practices. In general, this depends on the franchise agreement. For example, many franchise agreements specify that the franchiser is entitled to buy back the franchise location with all rights – often at a fixed price determined in advance. Knowing this, franchisees should always evaluate opportunities with their exit strategy in mind!

Business valuations are complex, but they needn’t be a burden. The experts at Flagler Financial have performed complete valuations to prepare for mergers, acquisitions, IPOs, and partner exits. To find out more, contact us today.