Business Valuation Services in Houston
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Are you looking for professional business valuation in Houston? Wiley Financial is an accredited valuation company offering services to businesses in different industries. We strive to use up-to-date resources to meet your needs.
Business valuation definition
Business valuation is the general process of determining the current economic value of an asset or company. The value of a business can be used for various reasons, such as taxation issues, legal proceedings, and sale value. It is also essential when a company wants to merge with another firm.
It uses several methods such as breakup value, book value, liquidation value, and others. The main three approaches include asset, earnings, and market comparison, with valuators combining several methods and approaches depending on the company’s nature.
Business Valuation Approaches
Asset Approach
The asset approach, also known as the cost approach, derives the value of a company by deducting current liabilities from current assets (tangible and intangible). The main methods include:
Adjusted Net Asset Method
The adjusted net asset method is the chief method in the asset-based approach. It assumes that the fair market value of a company is the difference between a firm’s current assets and current liabilities.
The method adjusts the asset’s historical value to the current fair value. It then reduces the value by deducting all assets. It is an ideal method for capital-intensive companies that are continuously registering losses.
Capitalization of Excess Earnings
The method values tangible and intangible assets independently. It uses the rate of attribution of intangible assets and returns of tangible assets to discount the earnings. It is, however, not popular with valuators since it should be the last option.
Income Approach
It is the primary approach with many valuators in Houston. It uses two primary methods, which are:
Discounted Cash Flow (DCF)
The DCF method uses a company’s expected future benefit streams to determine its value. The returns will likely be positive if the DCF outweighs the current investment cost. The downside, it relies on future projects, which are unreliable.
Capitalization of Cash Flow (CCF)
In this method, the value of a company is the projected profits based on future performance. It uses net present value (NPV) and capitalization rate. A valuator will divide NPV with the cap rate to determine a company’s value.
The downside of the method is that it relies on future projects, which are often inaccurate. It means you might realize less-than-expected returns. Besides, it is not an ideal method for startups since there’s insufficient performance data.
Market Approach
The market approach method allows the comparison of similar companies. It relies on past transaction multiples to determine the value of the subject business. There are three primary methods. They are:
Prior Transactions
This method uses past company transactions to determine its value. The valuator will ensure that past transaction circumstances meet current market expectations.
Guideline Public Company
The method relies on multiples of publicly traded companies to derive a business value. The public company, however, should be comparable to the subject firm. Since there are many differences between public and private companies, a valuator will adjust the public company’s multiples.
Guideline Transaction
This method determines a company’s value based on sales of private companies similar to the subject firm. The valuator will choose a company that best fits the subject’s economic and operations conditions.
Depending on the company’s industry, a valuator may find ample multiples. However, if the subject is a niche company, it might be daunting to find a comparable company. Most valuators in Houston will divide data based on the size, location, and transaction date to make the process smoother.
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Business Valuation Methods
Market Capitalization
Business valuation in Houston uses this simplest valuation method. It is the total value of a company’s shares multiplied by the share price. For example, a firm with 10 million shares selling at $50 will have a market capitalization of 500 million. It divides companies into large-cap, medium-cap, and small-cup.
Times Revenue
The times revenue method uses current revenue multiples to determine a company’s maximum value. The multiples depend on the company’s location and economic conditions. Generally, they range between one and two. Some industries will, however, have multiples of less than one.
Earnings Multiplier
The earnings multiplier is more accurate than the times revenue method. It identifies the value of a company as the earnings per share of stock. And since it uses a company’s profit, it is ideal for determining the exact value of a firm.
Discounted Cash Flow (DCF)
The method uses future cash flow projections to determine the value of a company in Houston. It means a company’s current value is its future income generation. The disadvantage of this method is that it uses future projects that can be incorrect.
Book Value
Book value is the net asset value, which deducts a company’s intangible assets and liabilities from its total assets. It is primarily lower than a company’s fair market value.
Liquidation Value
It would be a company’s value if it were to sell all its assets and settle its liabilities. However, intangible assets are not included in this method.
Data used in Business Valuations
What data do valuators in Houston use? Let’s find out.
Financial Records
Valuators will use a company’s revenues, costs to debt and others to determine its value. Besides, well-documented financial records allow valuators to project a firm’s future benefit streams and profits. It is also crucial to calculate startup growth rates.
Management Structure
Management with stellar performance will often increase the value of a company. Conversely, a company with a poor management structure will have a lower value. The skills and motivation of employees also affect the value of a business. Having loyal, experienced, and well-trained professionals will increase the value of a company.
Company Size
As expected, larger companies will have larger valuations than smaller firms will. It is thanks to their many streams of income. Large companies also have easier access to funding from banks and investors. Moreover, they can develop superior products and services, significantly increasing their revenue. Hiring experienced professionals is also easier for them.
Market Conditions
The current economic state, interest rates, and others can also influence the value of a company. When the economy is booming, there might be greater demand for a company’s products or services. However, in saturated markets, the value of a company may reduce.
Assets
Intangible assets such as a good reputation, brand awareness, customer relations, and trademarks can bolster a company’s value. While hard to measure, intangible assets play a critical role in a business’s valuation.
Getting the value of tangible assets such as buildings, vehicles, real estate, and others is easy. They also influence the value of a company. It depends on the quantity and their conditions.
Competitive Advantage
A company with a competitive advantage will command a higher valuation. If this advantage is lost, the value will reduce significantly.
Business Valuation Methods
If you are looking for an expert valuator in Houston, consider the following aspects:
Credentials
To determine whether a business valuator meets your needs, consider their credentials. The primary certificates are:
Accredited Senior Appraiser (ASA)
The American Society of Appraisers sponsors this accreditation. To obtain it, a valuator needs to:
- Have at least five years of experience in the accredited senior appraiser role.
- Complete all four Principles of Valuation (POV) courses and pass exams at each level. One can, however, complete coursework with ASA-vetted organizations.
- Have a four-year degree in business or related courses.
- Have two appraisal reports that have passed peer review. The reports gauge one’s compliance with ASA’s principle of appraisal, compliance with USPAP, and technical competence
A valuator is subject to reaccreditation after every five years. To qualify, you need to provide proof of continuous learning.
Chartered Financial Analyst (CFA)
The CFA institute sponsors this credential. Unlike ASA, which focuses on appraisal, it is more diverse, serving portfolio managers, security analysts, and other investment professionals. To qualify for CFA, you need to pass all exam levels. Each level has approximately 300 hours of study.
It is arguably one of the most challenging accreditations. Level II and III are administered annually with a pass rate of less than 50%.
Certified Valuation Analyst (CVA)
The National Association of Certified Valuators and Analysts (NACVA) grants the credentials to business valuators. To qualify, one must:
- Be a licensed CPA professional.
- Complete a five-day training and submit three personal and business references.
- Complete at least 60 hours of CPE after every three years.
- Hold a bachelor’s degree in business.
- Pass the mandatory CVA exam.
Other credentials to consider are; Accredited in Business Valuation (ABV) and Certified Business Appraiser (CBA).
Wiley Financial is an accredited valuation company serving companies across different counties. Call or email us today for a professional business valuation in Houston.
