Business valuations are essential to determine the economic value of your business. Multiple methods exist, all of which take time. But how long does one take exactly?
No business is the same, so no valuation will be either, but you can expect a timeframe of three to five weeks.
To understand why that’s how long it will take, you need to understand the process and the importance of a good and accurate valuation.
Importance of business valuations
Business valuations services are used to determine the value of a business. A business owner might want this for a variety of reasons, with one of the most common being to sell the business.
For business owners looking to sell, knowing its true value is essential – at least, if you want to be taken seriously in negotiations and get a fair price.
Essentially, if you don’t know the business’s value, how do you know the amount you’re being offered is fair? Remember: buyers want to buy for as low a price as possible.
But valuations aren’t just important for business disposals. Knowing a business’s value is critical if you want to attract investors. You will want to know the value of the equity you are proposing to sell.
Business valuations are also important for Employee Ownership transactions, EMI schemes (and other share schemes) and even divorce proceedings.
Business valuation process
The two most common methods to value a business are the market approach and the income approach.
The market approach is based on the principle that the value of a business derives from demand for similar assets. The company’s value is determined based on a comparison to businesses that are either listed on a stock exchange, or involved in a transaction, such as a sale, for which data is publicly available.
When applying the income approach, the cash flows expected to be generated by a business are discounted to their present value equivalent using a rate of return that reflects the relative risk of the investment, as well as the time value of money. This is also known as discounted cash flow (‘DCF’). DCF is based on the theory that the value of an asset is equal to all its future cash flows.
Depending on the scenario, other methods used are more forward looking. For instance, early-stage businesses are often valued on a forward-looking basis, using forecast revenues or EBITDA. In contrast, the value of a business in a liquidation/insolvency scenario would be heavily based on the latest balance sheet.
Outsource your business valuation
The truth is, most businesses use a combination of all these methods to find the true value. Typically it can take 3-5 weeks to crunch the numbers and complete a thorough analysis and business valuation.
As such, business valuations are no easy thing to do alone, and when you’re working out something as important as the value of your business, mistakes can be costly, while peace of mind is priceless.
That’s why you should consider outsourcing your business valuation processes to an accountant. They will complete a preliminary analysis of your business to work out the most suitable valuation method and present a valuation report that reflects its true value.
The key is to make sure you get an objective analysis. Inflating the numbers threatens to throw the whole project off, so you’re likely to seriously benefit from an outside opinion.
Team SAS is dedicated to helping our business clients create, grow and sustain great businesses. achieve their goals. Contact us today to get your business valuation started.
If you are interested in finding out more information for SMEs see a wide range of resources and insight found on the Resources section of our website.
Use of this information is for reference only. Specialist Accounting Solutions Ltd accepts no liability for any errors therein or any losses or damages arising from it.