Business Valuation Services in Texas
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Wiley Financial conducts business valuation in Texas, helping hundreds of companies realize their fair market value. We use standard valuation methods and approaches, ensuring our process is in line with industry regulations. We valuate companies from different industries, so contact us for your valuation needs.
What is a Business Valuation?
It is the general process of determining a company’s current economic value. Many reasons, such as legal issues and the sale of a business, can lead to a business valuation. A certified valuator carries out the process of determining the actual value of the company.
They can analyze the company’s management, future earnings, and capital structure. As you’d expect, there are many tools for valuation. However, valuators in Texas will use varying tools depending on the scope of the valuation and the type of business.
The process involves different approaches, such as comparing with guideline companies to get the company’s actual value. Government agencies such as the Internal Revenue Service (IRS) require a business valuation in specific scenarios.
Types of Business Valuation
There are many types of valuation depending on a company’s industry. Wiley Financial offers several of these valuations. Some of them are:
Startup valuation is the process of determining the economic value of a startup. The process differs from mature companies since they are in the pre-revenue stage. As such, we use unique methods and approaches. These methods include:
This approach is the brainchild of Dave Berkus, an American angel investor and venture capitalist. It bases its valuation on the following factors:
- Basic value
- Production and consequent sales
- Relationships in its market
The approach analyzes how each factor contributes to the company’s overall value. It is also referred to as the development stage valuation approach.
Future Valuation Multiple
This approach project returns investment under a specific period, such as growth, expenditure, cost, and sales over the said period. These projections determine the value of the startup.
The approach combines all expenses and costs of the startup and its product. It can include the cost of buying physical assets. Calculating the total value gives the startup’s fair market value. The approach excludes future projections and intangible assets such as brand value.
Market multiple is arguably the most popular startup valuation approach among many valuators in Texas. It considers recent acquisitions or sales of similar startups in the market. The base valuation is the value of the recently acquired startup, giving the subject startup a fair market value.
Discounted Cash Flow
It projects a startup’s future benefit streams. A discount rate is used to discount the valuation of future cash flow. And since investing in a startup is risky, most valuators will apply a high discount rate.
Private Company Valuation
Private company valuation is generally steps to determine a private company’s worth. Private companies require a different approach than valuating a public company, where you don’t use its stock price and the number of shares. It is because data on their stocks is not public.
Besides, most private companies do not follow government or industry reporting regulations. As such, they can provide unstandardized information, which can be hard to analyze. Nonetheless, valuators in Texas will use either of the following methods:
Comparable Company Analysis (CCA)
This method assumes that a guideline company has identical multiples as the subject startup. And since private companies are not public, valuators will look for a public company that is likely to have similar multiples. It is the most common method of the three.
A valuator like Wiley Financial will identify peer companies with similar characteristics, calculating the multiples to find the industry average. Multiples differ between industries and the company’s growth level. Often, valuators will use the EBITDA multiple.
An EBITDA multiple is a company’s net income with a combination of depreciation, interest, amortization, and taxes. Comparable firms’ multiple is multiplied by the EBITDA multiple to get the subject company’s value.
Discounted Cash Flow (DCF)
This method uses future cash flows to determine a company’s value. Since private companies have no public data, data of comparable companies are used. The revenue growth of the target company is, therefore, the average growth rate of the guideline companies.
With the revenue growth, a valuator will then project the company’s operating taxes and others to generate the free cash flow over a specific period, such as five years. They then use the weighted average cost of capital as the discount rate. With the free cash flow and discount rate, the value of the private company is calculated.
First Chicago Method
It is the combination of comparable company analysis and discounted cash flow. It, however, considers worst-case, base-case, and best-case scenarios. It will make Growth and terminal projections for a specific period.
The discounted cash flow method is then used to evaluate each scenario. Finally, the probability average of the three scenarios determines the value of the private company.
Factors to consider before a business valuation
Risk and Profitability
Ideally, valuators conduct a business valuation to assess the risk or profitability of the intended sale of a business. Besides, an investor is keen on the deal’s opportunity cost. The investor will buy the company if the deal’s profitability outweighs its risk.
One should also consider their reasons for selling the business. And these reasons may vary among business owners. For example, the time factor will be a priority for a person who wants to sell quickly. Often, they don’t mind if they’ll sell the business at a loss. On the contrary, a profit-oriented owner will wait until the opportune time to see the company.
Accuracy of Data
Before committing to a business valuation, a business owner must ensure the past, and present data is valid. It will enable an accurate and objective fair market value. The more financial, management, and operations information you acquire, the more accurate the valuation will be.
Market forces and external factors also affect the value of a business. For example, the value will decrease if a company’s industry bears the brunt of a pandemic. Besides, some industries are more volatile compared to others.
Methods of Business Valuation
Breakup value is the value of a large company’s lines of business. For example, a company might have telecommunication and banking lines of business. Suppose the breakup value is larger than the public company’s value. In that case, investors may press the company to split into two.
As such, it will have a distinct telecommunication company different from the banking line of business. This separation is to maximize the profits of the shareholders.
Replacement value is the monetary value a company would spend to replace an asset. The replacement value is volatile as it is susceptible to market trends. Most insurance companies use replacement value to place a value on an insured asset. Since replacing assets is expensive, companies often put a lifespan to an asset.
A company would get these proceeds should its assets be liquidated and liabilities paid off.
Market capitalization is a company’s total shares and price per share multiplied. Valuators in Texas use this method on public companies.
Other methods include times revenue, earnings multiplier, and discounted cash flow (DCF).
Who uses Business Valuation in Texas?
Entrepreneurs will seek to sell their businesses at a profit. They turn to expert valuators such as Wiley Financial to determine a fair market for their business. The process and the value ensure they do not scare off potential buyers. It helps improve their credibility, hence building trust with the buyer. They can also use valuation to secure funding and merge with other businesses.
These professionals help individuals make sound investment decisions. With a valuation report, an investment banker can determine whether the business is worth their client’s investment.
Venture capital firms
Business valuation is essential to venture capital firms since they must report how their investments are performing to limited partners. A business valuation provides the partner with a detailed report on their investments.
VCs also use business valuation when they plan to sell a business. Besides, it helps on the negotiating table, enabling them to get a profitable deal.
Others who utilize business valuation include retail investors, employees, and corporate M&A teams. Call or email us today to get a professional business valuation in Texas.