10 Steps in the Business Valuation Process

October 2022

The process of business valuation is complex and vital. There are many factors to consider when valuing a business, and the process can differ for each company. However, there are some general steps that businesses of all sizes follow while valuing their business.

For starters, business valuation is the process of determining the economic value of a business or company. The value of a business is usually determined by its financial performance and the market conditions of its industry. One can use many different methods to value a business for sale. Still, there are generally ten steps followed in the business valuation process. Let's see each step in detail.

1) Define the Purpose of the Valuation

The purpose will determine the type of valuation method used, the inputs (such as data points), and the assumptions used in the valuation. There are many reasons a business might be valued, such as for sale, tax purposes, or financial reporting. Each of these purposes will require a different type of valuation and result in another value for the business. It is important to consider the reason for the valuation, as this will impact the outcome.

2) Select the Appropriate Valuation Method

The most common valuation methods are the market approach, the income approach, and the asset-based approach. Each process has pros and cons, so selecting the best method that suits the particular situation is wise.

For example, the market approach is based on the principle of substitution, which states that a rational buyer will pay no more for an entity than the cost of acquiring an equivalent one. Let's say your Las Vegas Company pays dividends. It would be prudent to use the Dividend Discount Model (DDM) for valuation. 

3) Collect Data Points

Data point collection can be done through financial statements, tax returns, and other sources of information such as surveys, interviews, and other research methods.

To properly evaluate a business, one would need data points such as the company's financial statements, marketing materials, and business model. Depending on the company's industry and the competitive landscape, one may need a different set of data points.

Some common data points that prove vital for valuation:

● Sales figures
● Customer satisfaction ratings
● Employee retention rates
● Market share
● Revenue
● Expenses
● Profit margins
● Growth rates
● Capital expenditure
● EBIT (Earnings Before Interest and Taxes)
● Macroeconomic conditions

Tip: It can be helpful to look at industry averages and compare them to the company in question. By looking at all of this information, you can get a pretty good idea of how successful a Las Vegas business is and how it performs relative to others in its field.

4) Analyze Company Management

This step helps determine whether the company is being run efficiently and effectively. It can also help identify any potential red flags that may indicate problems within the company.

To properly analyze company management, one must first understand the leadership's role in the organization. In general, management is responsible for ensuring that the company's resources are used to achieve the company's objectives. This includes (but is not limited to) setting goals, developing strategies, and implementing policies and procedures.

5) Evaluate Assets' Market Value

To do this, appraisers will look at the current market conditions and trends to estimate what a potential buyer would pay for the assets. This includes looking at comparable sales, industry trends, and economic conditions. The assets include physical, tangible assets such as land, buildings, machinery, equipment, patents, copyrights, and the intangible assets of goodwill.

6) Review Financial Statements

A review of financial statements gives an accurate picture of the company's financial health. It identifies potential pitfalls that may indicate problems. For example, if you see that the company has a high amount of debt, this could be a sign that it is in financial trouble. The example is pretty basic, but you get the point.

7) Determine Future Earning Prospect

Estimating the company's future earnings potential based on its past performance and current market conditions. Some factors include the business's financial stability, growth potential, and competitive environment.

8) Calculate Discounted Cash Flow

Discounted cash flow (DCF) is a technique used to value a project, company, or asset using the concepts of the time value of money. Future cash flows are estimated and discounted back to the present day at an appropriate discount rate. The sum of total cash flows (both inflows and outflows) is then used as a proxy for the value of your company or asset.

9) Perform Multiple Valuations

This can help understand what the range of possible outcomes for the business may be. It allows the valuer to test the sensitivity of the valuation to different assumptions and to identify potential problems with the valuation. It also allows the valuer to see how the valuation would change if you change certain factors.

10) Determine the True Value

The step where the push comes to shove. Remember: A business's actual value is not always easy to determine, but it is vital to have as accurate a figure as possible to make sound financial decisions. This value is determined by considering all of the factors considered in the previous steps.