March 25, 2022

How to Figure Out a Business Valuation


A business valuation is critical for entrepreneurs who are thinking of selling up and moving on as well as those seeking funding to help their business grow. An accurate picture of their company’s financial health can also steer business owners’ future decisions, indicating whether it’s time to change tact for a healthier bottom line.

Continue reading to learn how to figure out a business valuation, and discover the company that’s on a mission to streamline the valuation process, making it simpler and more efficient for evaluators.

What is a Business Valuation?

A business valuation helps determine the market value of an enterprise. By using a range of metrics, you can understand the economic worth of an organisation, which is highly useful for entrepreneurs and business owners looking to buy or sell a company.

Three Reasons to Conduct a Business Valuation

  1. Competitor benchmarking: A business valuation is a useful tool for comparing similar companies based on industry guidelines and financial metrics. With industry benchmarking, you can determine how a business ranks compared to its competitors in terms of market position, financial health and performance, which can support key decisions like budgeting. 
  2. Securing investment: An accurate valuation can support a business’s application for investment or finance. For example, an enterprise with reliable turnover and positive cash flow presents a low-risk investment opportunity, enabling investors to make an informed, strategic decision.
  3. Planning the sale of your business: Valuing a business can help calculate its market value, which can be used to determine its sale price. If you’re actively working to increase the value of your firm before putting it up for sale, you can also use the valuation to track company growth and confirm whether you’re hitting your commercial targets.

What Affects a Business Valuation?

Beyond fixed tangible assets that normally have a concrete value, there are other intangible assets to consider that may be more difficult to put a price on. But these must be taken into account, for example:

  • Reputation: A company’s reputation and goodwill can be a highly valuable asset. An overwhelmingly positive reputation can significantly boost your valuation, whilst a negative reputation could be detrimental to your prospects for selling.
  • Employees: Consider your employees’ skills and experience that a buyer will inherit when taking over the company.
  • Revenue trends and growth prospects: The company’s outlook for future growth can drive up the interest of investors or potential buyers.
  • Location: A company’s location can affect its value or the value of certain assets. In addition, it may be of interest to potential buyers for tax purposes, as different jurisdictions apply different tax rates.

General economy: In addition to a company’s assets, the economy can heavily influence valuations. When the economy is going through a recession, there is likely to be less appetite for high-risk investments, such as investing in start-ups or early-stage companies. As a result, valuations during these periods will be lower than when the wider economy is doing well.

Three Key Business Valuation Approaches

Professional evaluators often use a mix of business valuation approaches to obtain an accurate picture of a company’s worth. We’ve highlighted the most commonly used methods below:

1. Cost Approach

The Cost Approach is used to determine the value of an enterprise from a balance sheet perspective. A valuation expert will determine the overall business value based on the underlying value of the business’s assets. Professionals using this method start with the book-based balance sheet, building up the assets to fair market value for a more accurate picture of their current worth.

2. Market Approach

The Market Approach determines the value of a business by comparing it to similar companies that have a value that is publicly known. This method is particularly useful for public enterprises, since information on comparable public enterprises would be readily available.

3. Income Approach

The Income Approach is often used for established firms with profitable operations, as it is entirely based on cash flows. This method considers three core components of a business: the level of cash flows, the timing of cash flows and the risk associated with those cash flows.

A business valuation shouldn’t sell the company short, but it should neither overstate what it is worth. It’s a fine balance that takes time to achieve. However, there are tools out there to make the valuation process more streamlined — tools like Valutico.

Meet Valutico

INAA partner Valutico is a tech-enabled valuation platform supporting valuation practitioners in 26 countries. They’re on a mission to create a new generation of valuation professionals and help their customers grow their business with technology. 

Where the valuation process used to take days due to operational inefficiencies, Valutico empowers you to do it in a fraction of the time with a few clicks of your mouse. However, it’s important to note that Valutico is there to support you — not replace you.

The platform combines powerful algorithms and world-class financial databases to enhance the human experience in the valuation process. Valutico starts by asking you about key drivers of the business you’re valuing and helps you build a full valuation based on comps, transaction multiples and a financial forecast.

To find out more about the Valutico platform and the valuation process in general, we recommend attending their webinar on 28 April. During the event, Jean Poireau, Director at Valutico, will discuss the main theories of business valuation and run a real case business valuation of a European SME with the Valutico solution. Sign up for the event here.

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