What is a Valuation?

A valuation is an estimate (sometimes mathematically, other times arbitrarily) of the value of a business or of an interest in a business. The underlying theme of any real valuation should be the analysis of a company’s earnings, an assessment of current business assets (such as property, both physical and intellectual), and a reasonable opinion of the future of the company’s business.

A valuation should consider the longevity of company’s income, the market opportunities and its competition, the industry’s growth, the company’s management team and reputation (the company’s brand), financial statements and trends, client and customer analysis, the quality of the business (such as its products and services), and more.

Why are Valuations Undertaken?

A valuation is often necessary when raising capital (such as when selling securities, like stocks or bonds), or when selling or buying a company, to settle estates such as for divorce or insurance settlements and more.

Some Information to Include when Doing a Valuation

It is always recommended to use primary information when making a valuation such as tax returns and accountant prepared financial statements (audited financials). Often times the more years of historical statements the better (five years is a standard).

Additionally, interviews with the principal and employees should be conducted, as well as tours of the company’s properties or facilities. Client or customer lists should be utilized. Assets of the company should be referenced, and other information concerning business operations should be analyzed. Market competition should also be analyzed.

Valuation in Relation to the Market and Market Conditions

The valuation of a business should be considered in light of the overall market conditions of one’s industry and its potential growth, or decline. Additionally, a valuation must take into consideration what a company would actually pay for one’s business, both on the high and low ends.

Earnings vs. Assets

Often, many asked: what is ‘better’ or ‘more important’, company earnings or company assets? In practice a blend of assets and earnings can greatly vary considerably among businesses, projects and more.

The Way Assets and Earnings are Displayed

Many companies reconstruct the tax oriented income statements and balance sheets to display the information as it would appear to a new owner.

For the income statement: Often, the income statement is adjusted to better display the pre-tax earnings that a company can generate. This is often necessary because an income statement is prepared for tax purposes. In general this will attempt to lower taxable earnings.

For the balance sheet: A company’s balance sheet may display assets or equipment that are mostly fully depreciated, yet has a higher fair market value.

It often happens that a company’s balance sheet shows assets such as property at cost, but in actuality may have appreciated in value. In contrast, many companies may show unrelated business assets that should be eliminated. Such adjustments to a company’s book value of assets often need to be created in order to show the current fair market value.

PPM.net

PPM.net uses a series of approaches to value a company. We are often employed by companies just to value their companies stock or overall value. Our team can create a reasonable valuation so that potential investors or buyers do not balk at your offer, while at the same time maximize your profit or ownership.

Please contact us for a free quote or consultation or for more information on valuations.