Business valuation is usually done by a professional assessor and even then some important aspects might escape the notice of buyer and assessor. These could be minor details or may affect the entire value of the business. If you are a buyer, then you should understand these aspects very well even if you entrust the responsibility of assessment to some reputable company.
- Profit and earning, are two terms that need to be understood clearly. The amount you are going to spend in buying a company should get you an equal or more in terms of earning, as opposed to being invested in some banks or put in some other kind of investments. For example, a company may make a profit and bring back the entire investment made by you in six years. Then you need to calculate how much can the same investment earn in some other avenue, and compare the two amounts. This will help you to make a decision.
- Adjusted profits should be carefully calculated. For example, you may see a decent amount of profits in the books and later if you find that the owner did not take any money as salary, then if the amount of wages is adjusted the profit is bound to go down.
- Some years and periods may be very good for certain businesses and periodically the profits may increase or decrease. So you need to ensure that you understand the situations and conditions that lead to these fluctuations.
- While calculating profits, ensure to incorporate all important aspects like EBITDA and EBIT etc. Once the company is bought or merged with another company, the tax structure will change completely. Therefore, the amount of profit has to be clearly defined before and after the taxes and other deductions.
- The opportunity cost needs to be calculated when the company is being assessed through a discounted cash flow system.
- Consider the cash surplus and any long-term debt. These should be clearly defined and mentioned in the valuation so that the buyer offers a price that includes these values.
Another important factor to consider is goodwill. This is not a measurable quantity but does help the assessor to evaluate the entire business and its reputation in the market as a complete package with its other tangible assets. At times the goodwill may be negative even when the tangible assets are in good shape. The real price of any business is actually how much do you want to pay for it. So use a reputable appraiser and a combination of methods. Once you get the worth of the business, in monetary terms, they understand the values and use your own judgment as well.