When you’re preparing to sell your business — or looking to strategize for future growth — understanding how to calculate the fair market value of your company can make all the difference. To start, you’ll need to consider several key factors:
- Financial performance. Metrics such as revenue, profitability, cash flow, and EBITDA are pivotal. A thorough analysis of your company’s financial performance can reveal hidden strengths that may increase your business’s appeal to buyers.
- Assets and liabilities. The nature and quality of assets — including tangible assets like property and equipment as well as intangible assets like intellectual property and brand reputation — are critical considerations. A strong brand reputation, which will be highlighted during the valuation process, can become a significant selling point.
- Industry trends and competitive environment. Understanding industry trends and the competitive environment in which your business operates is essential for assessing its value. Remaining abreast of market demand, technological advancements, and regulatory changes will help you in making an informed decision during negotiations.
Calculating your company’s fair market value is a systematic process that requires careful analysis and evaluation. Following the three necessary steps described below will help you envision your growth potential and reach an accurate assessment of your business’s worth.
Step 1: Gather Financial Information and Documents
The first step in calculating fair market value is to gather all relevant financial information and documents related to your business, which includes financial statements, tax returns, cash flow statements, balance sheets, and any other pertinent financial records that provide insight into the company’s performance. Having all this information at the ready will streamline the valuation process.
Step 2: Understand Valuation Methods and Approaches
Once you have collected the necessary financial data, you’ll want to understand the various methods and approaches used in business valuation. This insight will put you in the driver’s seat when you want to grow or sell your business. Several common valuation methods offer different perspectives on how to determine fair market value:
- Income approach. This method estimates the value of a business based on its future cash flows, discounted back to the business’s present value. By highlighting the future potential of your business, this method can make it more attractive to buyers.
- Market approach. Using valuation multiples, this method evaluates comparable companies or transactions using the same standardized financial metrics, which provides a realistic benchmark for the valuation of your company. Common multiples include ratios such as price-to-earnings (P/E); price-to-sales (P/S); and enterprise value-to-EBITDA (EV/EBITDA), which is the most common approach in the sale of middle-market businesses.
- Asset-based approach. This method calculates the value of a business based on its net asset value, which is the difference between total assets and total liabilities. It is particularly useful for businesses with significant tangible assets.
Step 3: Seek Professional Assistance for an Accurate Valuation
While you can attempt to calculate fair market value on your own, a qualified investment banker or valuation professional can provide a more accurate and reliable valuation. These professionals have the expertise and experience to conduct a thorough analysis of your business while considering all relevant factors in developing a comprehensive and credible valuation.
Leverage Your Business’s Fair Market Value for Success: A Case Study
Many PCE clients who have followed these steps can attest to the opportunities created by a thorough calculation. One client, a manufacturing business owner, was initially uncertain about how much his business was worth. After working together to accurately calculate the fair market value using comprehensive valuation methods, we then regularly reassessed and updated his business valuation. This kept him informed about his company’s financial health so he could make strategic decisions that drove sustainable growth and profitability. When the time came to sell his business, he was able to negotiate confidently with potential buyers and achieve a lucrative sale that exceeded his expectations.
***
Calculating the fair market value of your business is a critical step in strategic planning and decision-making. Understanding the key factors involved in valuation, following a systematic approach, and seeking professional guidance when needed will ensure an accurate assessment of your business’s worth, which in turn creates growth and investment opportunities and enhances transparency and credibility with stakeholders, investors, and potential buyers.
Remember, the fair market value of your business can fluctuate based on various factors. For professional assistance to ensure a reliable valuation, contact PCE today. Our experienced team is here to help you achieve your business goals.
