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What do business valuation firms do?

a business valuation firm using spreadsheets on a table

Business valuation firms play an important role in the business world. These firms help companies determine the value of their businesses, which can be helpful in a number of different situations.

For instance, if a company is looking to sell, they will need to have a clear understanding of what their business is worth. Likewise, if a company is looking to raise money through an initial public offering (IPO), they will need to have a good sense of their business valuation.

Let’s take a deeper look at what business valuation firms do and how they can help your business.

What Do Business Valuation Firms Do?

Business valuation firms offer a number of different services. Some firms focus on providing valuations for businesses that are looking to sell, while others may focus on providing valuations for businesses that are looking to raise money through an IPO.

In general, business valuation firms will first conduct some research on the company in question. This research will help the firm understand the company’s financial situation, its history, and its prospects for the future. Once this research is complete, the firm will then use its expertise to determine what the company is worth.

Business valuation firms generally follow one of three approaches: the asset approach, the market approach, or the income approach.

The Asset Approach

The asset approach values a company based on the value of its underlying assets. This method is most commonly used when valuing businesses in industries with high barriers to entry, such as manufacturing businesses with specialized equipment. To calculate the value of assets, appraisers first determine the replacement cost of each asset and then subtract any depreciation. The remaining value is then added up to arrive at a total value for the company.

The Market Approach

The market approach estimates the value of a company by looking at comparable companies that have been sold recently. This method is most commonly used when valuing companies in mature industries with many comparable companies, such as retail businesses. Appraisers first identify similar companies that have been sold and then adjust for differences between those companies and the one being valued. The purpose of these adjustments is to arrive at a total value for the company being valued that is reflective of recent market transactions.

Income Approach

The income approach estimates the present value of all future cash flows that a company is expected to generate. This method is most commonly used when valuing growth companies in industries with few comparable companies, such as technology startups. Appraisers first forecast future cash flows and then discount them back to present value using an appropriate rate. The purpose of discounting is to account for the time value of money—the idea that $1 today is worth more than $1 tomorrow because it can be invested and earn a return in the meantime. After all future cash flows have been discounted back to present value, they are added up to arrive at a total value for the company being valued.

How Can Business Valuation Firms Help Your Business?

If you are thinking about selling your business, it is important that you have a clear understanding of what your business is worth. A business valuation firm can help you determine an accurate value for your business. This information will be helpful in a number of ways.

First, it will give you a better sense of how much money you should expect to receive from a sale. Second, it will help you negotiate with potential buyers from a position of strength. And third, it can help you avoid selling your business for less than it is worth.

If you are thinking about going public with your company, it is also important to have a clear understanding of your business valuation. This information will be used by investment bankers to determine how much money they are willing to invest in your company. It will also be used by potential investors to determine whether or not they are interested in investing in your company. In short, having a good understanding of your business valuation can make or break your chances of successfully going public.

 

Business valuation firms play an important role in the business world by helping companies determine the value of their businesses. These firms offer a number of different services that can be helpful for companies that are looking to sell or go public with their businesses. If you are thinking about taking either of these steps with your company, it is important to work with a reputable business valuation firm so that you can get an accurate value for your business.

If you need improved financial results immediately, watch our three-part series on how to create financial stability now and improve profitability for the long term.