How Business Valuation is Done in Seattle?

1.jpgMost of us have a good idea of what our business is worth based on how successful it is. Often though we’ll oversell our own ideas to ourselves, and this number will turn out to be quite far from the mark. Sometimes it’s necessary to get a proper business valuation. For instance, maybe you’re trying to sell the company and need to know it’s market worth in order to sell. Perhaps you have to know it for your taxes, or you might even be dealing with a litigation. Whatever the case, you’ll want an accurate valuation.

You’ll have five steps to go through when getting a valuation:

  • Planning and preparation
  • Financial Adjustments
  • Deciding on a Valuation Method
  • Take time to Apply the Method
  • Coming to a Value Conclusion

Step 1: The Importance of Prepping and Planning

You’ll want to keep yourself as organized as possible, so start by understanding why you need this valuation, and then gather together all the information and data that might be relevant. You should understand that the valuation isn’t an absolute. They can tell you about what the company is worth, but not the exact amount.

You should remember these things as you go:

  1. See how the business operates. Is there a tax-efficient structure to it, and can it be improved? Are sales on the rise or on the fall? How big is your company demographic?
  2. Business valuation is not just an exercise in numbers where you subtract your liabilities from your assets, it’s also based on the value of your intangible assets.
  3. Carefully choose your appraisal team. If you work alone then you’re going to get tired quickly, and you’ll be quite likely to make a mistake. Find an accountant that does good work, then consider bringing in a professional broker and attorney.

Generally speaking, company owners normally sell for the sake of making a profit. The sales process can then act like an auction more than anything else, where the highest bidder gets the prize. Your main focus is to find the fair market value, or the amount that a buyer could reasonably be expected to offer.

Sometimes a rival may end up approaching with an offer even though the owner hasn’t stated that they’re currently looking to sell. These companies may be looking for resources to supplement themselves. This is called a synergistic buyer. They do this by applying an investment standard. They use public information to assume the value of your business.

Sadly, one of the most common reasons is that something has occurred, like bankruptcy or a natural disaster, and the company must liquidize. In these cases the owner is unable to wait for the best offer and must sell as soon as possible.

By understanding why you need this information you can figure out what numbers you need and what level of depth you’ll need to go to. This data may include financial statements, operational procedures, marketing and business plans, customer and vendor specific information, and staff records. A few of these may give you a good range to work with, however if you want a more specific number then you best be prepared to do some calculating.

Step 2: Recasting Finances

The company’s financial information will provide the key inputs into the process. The two main financial statements you need for an accurate valuation are income statements (financial reports that show profitable the businesses operations have been or currently are) and balance sheets (statements that show the relationship between business assets, liabilities and owner’s equity). You should have at least 3 years of historical income statements and balance sheets in order to get an accurate valuation.

Since business owners have considerable discretion in how they use the business assets as well as what income and expenses they recognize, the company’s historical financial statements may need to be recast or adjusted. So it’s important to construct the relationship between business assets, expenses and income that these assets are capable of producing. These will require recasting in order to generate inputs for use in business valuation.

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Step 3: The Different Valuation Methods

Now that you’ve got your data you can pick a method. It’s best to pick multiple methods as a form of cross checking your work and better understanding your results. If all the results are similar then you’ve probably done things correctly.

A few popular methods available are:

The Asset Valuation Method

You’ll use this method to determine the value of your business’ current assets. While this method can be quite valuable, it likely won’t give you enough information for a truly accurate value, especially if your business is small. A company may have many assets, but if it doesn’t generate income, then it’s just a company that sits on resources. However, you may only have a few assets, but those could be create a lot of profit. This method is best suited to larger companies, as it’s not always the best at showing you your business operations.

A few of the documents you’ll want to include in this are:

  • Services and products within your intellectual property.
  • Key contracts for customers and distribution.
  • Your partnership agreements

Typical unrecorded liabilities that are included in the valuation are:

  • Future decisions on legal matters.
  • The company’s obligations with regards to income and property tax.
  • {Environmental compliance costs.|The cost of complying with environmental standards.|Your costs for environmental standard compliance.

The Liquidation Value Method

Without considering the reputation of the business or owners, this method strives to tell you what the company would be worth if it was sold on an open market. It takes into account the physical assets, things like equipment, inventory, and real estate.

Comparable Company Analysis


The Comparable Company valuation technique is generally the easiest to perform. You will have to have publicly traded securities, so that the company’s value can be compared against that of other companies more easily.

This is best used for small additions are being done or considered, ones that don’t change the control of the company. This does not include times where the power balance is shifted from one person to another. This is the most popular method, so long as no power change is happening.

Discounted Cash Flow Analysis

DCF (discounted cash flow analysis) is used to ascertain the amount of money the company will generate in the future, and base the value off of that. This is arguably the most correct method to be using.

There are still a few problems that get in the way of this method. What DCFs can offer are estimates based on theory and computation, but they can also lose out in accuracy of the exact value of the company. It’s often a very hard method to get right because it’s looking at future money. By attempting to predict the future you’ve already based your numbers off of speculations and assumptions, and knowing that you’ll find it harder to get an accurate number the further in the future you look. Most assumptions have the power to drastically change the company’s predicted value. DCF valuations are typically most useful and reliable in a company with highly stable and predictable cash flows, such as an established utility company.

Precedent Transaction Analysis

Another fairly easy valuation method to perform. This is for companies that have made an acquisition, perhaps a share price, and will need the number of shares acquired as well as the amount of debt that’s been assumed. This should be assumed if the acquired company had publically traded instruments prior to the transaction.

Precedent Transactions are used to attempt to ascertain the difference in value of a comparable company that was acquired before and after the transaction took place, in other words the market value before the transaction was announced compared to the amount that was paid for it where a change in control took place. The difference will be representative of the premium that was paid to acquire the controlling interest in the business. This method is best suited for valuation in situations of acquisitioning other companies.

Leveraged Buyout Analysis

A leveraged buyout (LBO) is the acquisition of a public or private company with a significant amount of borrowed funds. LBOs are typically used when looking to acquire companies inexpensively with the idea that they can be sold at a higher profit within a couple of years. These are usually conducted by private equity firms that are attempting to maximize returns from these investments by using as much borrowed capital as possible (otherwise known as debt financing) to fund the acquisition of a company. There are three ways to do an LBO analysis:

  1. Impute a company value using a reasonable ratio of debt to equity, as well as an assumed minimum return required for the financial sponsor.
  1. Assume a minimum required return for the financial sponsor plus an appropriate company value, and from this impute the required debt/equity ratio.
  1. Assume a reasonable equity/debt ratio and the company value, then calculate the expected return from the investment.

Step 4: How to Apply the Methods

Now that you’ve got your data you can finally find the value of your company. None of these methods will yield a completely accurate result, so you should use a few of them. As well, thanks to having multiple sets of information for the different methods you use you’ll be able eliminate some of the possibility that there were clinical or calculation based errors, ensuring your company has an accurate assessment. Even if it means you have to do more work, it also means that you’ll have a more accurate valuation for your company.

Step 5: Concluding the Value

With the results from the selected valuation methods available, you can make the decision of what the business is worth. This is also called the business value synthesis. Since no one valuation method provides the definitive answer, you may decide to use several results from the various methods to form your opinion of what the business is worth. At the end of all this research, the value of a company will always be somewhat subjective. Remember that you’ll often place a higher value on your company when others may be more than happy to tear it apart. You’re going to want to reconcile that difference that you see in your company’s value between the different methods. You can do this by doing the research into the company, the finances, the past spendings, earnings, growth projections, and such to calculate a number that should be similar. The rest comes down to the art of the deal.