Confused About Business Valuation Methods?
As an M&A specialist and business investor, I often encounter business owners who are planning to sell their companies within the next few years.
One common question that arises is why business valuation methods are so confusing.
In my opinion, many of the more exotic methods can be frustrating, since most valuations are ultimately decided by what the owner wants for their business and what someone is willing to pay for it.
However, there are several methods that can be used to value a business, and it’s important for SME owners to understand them to make informed decisions.
This article aims to clarify various business valuation methods and provide guidance for SME owners navigating what can be a complex process. It’s worth stating that a conversation with an M&A specialist can make all the difference in reaching the best possible valuation and outcome when the time comes to sell.
Valuation Methods
Each business is different, so there exists a broad array of valuation approaches. These approaches are built to address the specific needs of businesses and are based everything from the financial health of the business to trends and owner preferences.
Here are several popular methods, including those cited in Harvard studies: + Asset-based approach
+ Income-based approach
+ Market-based approach
+ Discounted cash flow (DCF) method
+ Multiples method
+ First Chicago method
+ Venture capital method
+ Real options valuation
+ Economic value added (EVA)
Choosing the Right Method
Choosing the right valuation method for your business depends on a variety of factors, including industry dynamics, growth potential, and your personal objectives as an owner. It’s common for established business owners to opt for a multiple of EBITDA as a justification for their desired payday, but often they choose a multiple that is higher than the sector average.
Assessing Your Business’s Unique Qualities
To achieve an objective and fair valuation, it’s crucial to understand your business’s strengths and weaknesses, financial history, and growth prospects. This assessment will help you identify the most appropriate valuation methods for your business.
Maximising Business Value
Collaborating with experts can help you develop a strategy to enhance your business’s value and attract the right buyers. This could include improving financial performance, increasing operational efficiency, identifying potential synergies with buyers, and exploring opportunities for inorganic growth through the acquisition of other businesses.
If you’re an SME owner planning to sell your business in the next 2–4 years, I invite you to connect with me on LinkedIn or send me a message. Together, we can work to maximise your business’s value and achieve your objectives.
#SME #MergersAndAcquisitions #BusinessValuation
