Why You Should Know the True Value of your Business & Calculation Methods

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Why You Should Know the True Value of your
Business Calculation Methods

• By HPACCOUNTING.COM

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Introduction

• Before going into some detail about the various
  asset valuation methods, it will be relevant to
  know some of the usual reasons for carrying out
  this exercise. The most common one is when
  businesses are sold and ownership changes hands.
  As an owner, you might be retiring from business
  due to failing health, divorce or other family
  compulsions and you would want to know the value
  of your business to get a fair price. Another
  motive might be that you have to raise debt or
  equity financing to meet sudden cash flow
  requirements or expansion. In this case,
  potential investors will first want to verify the
  worth of your business. You might also want to
  take partners on board or add shareholders in
  which case the value of a share needs to be
  accurately determined.

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• Regardless of the company valuation methods
  calculation that you may choose, the true value
  of your business depends on a number of
  extraneous factors that may not be connected
  directly with your business. These range from the
  current state of the economy to the value of
  other businesses of similar nature operating in
  your area. For example business valuation in San
  Francisco for your industry will be largely
  determined by the selling price of previous sales
  of similar type of business in the area.
• Expert Certified Valuation Analyst (CVA) One of
  the crucial things that should be kept in mind is
  that you should not value your own business but
  instead hire a professional firm to do it for
  you. The reason for this is that it will not be
  possible for you to objectively put a value on
  your own business. You will not have the
  necessary expertise or distance to step back and
  get an unbiased view. Hence, it is advisable to
  get the valuation done by an expert Certified
  Valuation Analyst (CVA) or the equivalent in your
  location.

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• For instance, if you are looking for business
  valuation in California, get in touch with us at
  HP Accounting. We are a CPA and a business
  valuation firm providing intangible asset
  valuation, dealing with issues involving
  litigation and clients compliance with IRC 409A
  and SFAS 123(R) rules. We use a variety of
  business valuation methods to assess the fair
  price of your business.

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• Asset Based Method Basically, this entails
  totaling up all the investments in business. One
  is the net asset valuation method where the value
  of net balance sheet value of assets is
  subtracted from the net value of liabilities. The
  second is the liquidation asset based method that
  estimates the net cash that would remain if all
  assets were sold and liabilities adjusted from
  the proceeds. This approach is suitable for
  corporation valuation where all assets are held
  in the name of a company but not for sole
  proprietorship concerns where separating assets
  held in owners name for personal or business use
  may be difficult.
• Earning value method Here, we estimate future
  cash flow levels of the company based on past
  earnings, take into account unusual revenue and
  expenses and then multiply the normal cash flow
  estimates by a capitalization factor. Somewhat
  similar is the discounted future earnings method
  where the trend of future expected earnings is
  divided by the capitalization factor.
• Market value method This is done by comparing
  the value of your business in terms of size,
  scale and facets like turnover, revenue and
  balance sheet parameters with other similar
  businesses recently sold in your location. Here
  too, fixing the price of a sole proprietorship
  concern is difficult as public information is not
  easily available of prior sales.

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• Apart from these Business valuation methods,
  there is also another approach that falls within
  the gambit of corporate valuation methods. At HP
  Accounting we often have to use it on behalf of
  our clients when the need arises. It is known as
  the Leverage Buyout Analysis or LBO.
• LBO method for business valuation is typically
  used by private equity firms who look to acquire
  companies at a low cost and then hope to sell
  them at a substantial profit in future. LBO firms
  generally minimize the quantum of their own
  investments in this acquisition and instead use
  as much as debt financing or borrowed capital. If
  the objectives of the LBO firm are met and the
  firm does makes a future profit, leveraging debt
  maximizes the returns for the investors.

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• However, we are very cautious in our approach and
  only take up LBO when market conditions are
  conducive to it. When the market is stagnant or
  the economy is in recession and in a tail spin,
  LBO is difficult to use. High interest rates,
  high credit spreads for High Yield Bonds and low
  capital markets activities are scenarios when we
  do not use this one of the many company valuation
  methods calculation.
• HP Accounting provides Business Valuation Expert
  Witness.
• Services offered by HP Accounting are not limited
  to business valuations in San Francisco,
  California where we are based. In fact we offer a
  wide range of accounting solutions to our
  clients. Some of the bookkeeping functions that
  clients outsource to us are business tax return
  preparation, all accounting functions, audit
  preparation and liaison, budgeting and personal
  financial statements. We also help businesses set
  up their own accounting infrastructure.

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• Our consultancy services have been greatly
  appreciated by our clients. These include
  Sarbanes Oxley compliance, audit preparation,
  software implementation, forensic accounting, MA
  and public company reporting.
• For all your requirements of accounting,
  valuation and consultation, get in touch with us
  at HP Accounting. We assure guaranteed solutions
  and optimized results. Get Lost Profits Expert
  Witness at HP Accounting.