How to Determine the Value of a Business?
The value of a business is determined via the process of business valuation. Business valuation is important for organizations because selling and buying businesses is a standard part of the corporate sector and large-scale businesses often have to rely on accounting services to conduct an advance business valuation.
Before diving into the particular method of determining the value of your business, it is important to be familiar with some of the following basics:
What is Business Valuation?
When techniques and resources are employed to evaluate the worth of a business it is called business valuation. This service is used by both sellers and buyers. Sellers use business valuation to set a suitable price for their business, and buyers use it to decide whether to buy a business.
Organizations and different types of businesses make use of the accounting services available in Malaysia for business valuation to either sell or buy a business in a profitable way.
A business valuation includes the determination and use of the latest trends and values of the market to set an appropriate value of the business. It is a complex process that involves thorough research of the market, competitive research and analysis of a business’s financial conditions.
Small-scale businesses make use of the fundamental business valuation to determine the value of their company. A basic valuation can be performed by the internal team of a small company, or even yourself. Large-scale businesses and enterprises, however, have to rely on the accounting services offered by various accounting firms in Malaysia.
There are many different and changing variables in the advance business valuation.
Requirements for Business Valuation
- Financial statements that contain the details of financial dealings and overall information about the business’s financial history
- Copies of tax returns
- Legal agreements, licenses, patents and other documents related to the business
- The latest full balance sheet of the business
If you have hired an accounting firm, you should provide them with as much information about your business as you can because it will result in an accurate and successful business valuation.
Three Business Values
1. Book Value
The book value or the liquidation value is the most straightforward part of the total business value. It is similar to your net worth which means the total value of your business recorded on the books. You can obtain the book value after eliminating all of the liabilities from your business assets.
2. Present Value
Present value is determined using the current and anticipated cash flows, which indicates your business’s cost both in current and future times. A steady company that has a stable stream of earning has the best chance of getting an accurate present value.
3. Fair Market Value
This is the estimated price of your business according to the situation of the market at the time of valuation. As a seller, fair market value is the most important value for you because you use it to set a cost on your business while meeting the potential buyers.
Business Valuation Formula
There are different mathematical as well as conceptual formulas involved in determining the value of a business. You can start the business valuation process using various different steps as all of the following tools will give you a good estimate value of your business, and you can use the acquired number during negotiations.
A) Asset Valuation
B) Cash Flow
The majority of buyers are interested in learning about the earnings of your business and how much revenue it can generate. It is possible via a cash flow statement, which gives all of the details about cash coming in and out of business.
C) Seller’s Discretionary Earnings (SDE)
SDE = (Total Non-Taxed Earnings + Personal Salary + Non-essential Expenditures) – Liabilities
In a Nutshell
Business valuation is an essential step in selling or buying a business. Due to the rapidly changing economic conditions of a particular market or country’s economy, it can be quite difficult for firms to evaluate their worth accurately.
Therefore, you can use the accounting services present in Malaysia to determine an accurate value of your business and conduct effective negotiations.
For more information, feel free to get in touch with us.