Determining the value of a business is the first step in the process of buying or selling a business. The value of a business is related to the risk involved, the ability to generate an income stream, and the value of the tangible assets.
An expert business valuation report will be based on standard valuation methodology combined with the experience and knowledge of the valuation expert. The specific purpose of the business valuation and the size of the company will determine the depth of analysis and research required.
Basic factors that influence value are:
- Value of hard assets
- Recast cash flow analysis: normalize earnings
- Review factors that can impact future earnings
- Calculate and apply external factor discounts
- Analyze intangible values
The final step of a business valuation report is to make sure that the suggested price for the business passes the sanity test:
- Will the income cover the debt service?
- Will the cash flow provide the owner or manager with a reasonable salary?
- Can the cash flow provide for future capital equipment requirements?
- Will the cash flow provide a cushion to allow for fluctuations in the business cycle?