Business Valuations Colorado
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Wiley Financial is a leading company for business valuations in Colorado. With decades of experience, we help small companies know their fair market value. From using appropriate approaches and methods to hiring exceptional experts, we continue to be a favorite among many business owners.
What is a Business Valuation?
Business valuation is the process of determining a company’s economic value, used for several reasons, including sale value, taxation, and legal proceedings. Professional evaluators will conduct an audit on behalf of the owner to give an objective business value.
It might include analyzing a firm’s capital structure, future earnings, and management. As you’d expect, valuation companies in Colorado use different tools and approaches. Besides, the company’s industry determines the most appropriate approach.
Business valuation is crucial for taxation reporting, with the IRS requiring businesses to be valued based on their fair market value.
Business Valuation Methods
As mentioned, there are many valuation approaches. The following are the most common among evaluators in Colorado.
Market capitalization
Market capitalization is a company’s dollar market value of its outstanding stock shares. Investors use this value to determine the firm’s size, which is outstanding shares multiplied by a single share’s price.
Firms fall under three categories based on their market cap. The categories are:
- Large-cap: Companies worth $10 billion and above.
- Mid-cap: Companies worth between $2 billion and $10 billion.
- Small-cap: Companies with a $300 million to $2 billion market cap.
Generally, large-cap companies are safer since they represent stable and more established businesses. In addition, their longevity makes them a favorite for most investors.
Times-revenue method
This valuation method helps determine a firm’s maximum value. It uses current revenues’ multiples to calculate the business’s ceiling or maximum value. The economic environment, industry, and local business affect how many multiples an evaluator can use.
While a popular method, it is unreliable since revenues do not indicate a business’s profits. It is easy to calculate, especially for small-cap firms. It is because they have volatile earnings or are non-existent. It is also an ideal method for fast-growing companies.
Earning multiplier
You can use the earning multiplier if you want a more accurate business value. It uses a firm’s earnings per share of stock to calculate its stock price. As such, it enables investors to gauge how expensive a stock is compared to a company’s earnings per share.
Investors will shy away from purchasing the equity if the price is high. Evaluators also use earning multipliers of other companies to gauge how expensive the subject company is.
Discounted cash flow (DCF)
This method is similar to the earnings multiplier. It estimates a company’s value using its future cash flows. It, therefore, calculates the current value based on future revenue streams. Investors use DCF to determine if the company will be profitable in the future. Unlike earning multiplier, it includes inflation to determine a firm’s fair value.
Liquidation value
Liquidation value is the value of a business’s physical assets if they were to be sold today due to liquidation. It includes a company’s inventory, equipment, fixtures, and real estate. The value is more significant than salvage value but lower than book value.
Book value
It is the difference between a company’s assets and liabilities. It is similar to a company’s asset carrying value on a balance sheet.
Business valuation approaches
Asset approach
The asset approach is also referred to as the replacement cost or cost approach. The approach subtracts a company’s current liabilities value from existing assets value. It includes both tangible and intangible assets. The primary methods used are:
- Adjusted net asset method
It is the most popular method in the asset approach. According to this method, the difference between a firm’s assets and liabilities value is the company’s value. It adjusts historical assets value to the current company’s fair value.
An evaluator will then use recorded and unrecorded liabilities to reduce the value of the assets. The value achieved is known as floor value. It is an ideal method for capital-intensive or holding companies registering consistent losses.
- Capitalization of excess earnings method
This hybrid method uses the income and asset approach. Evaluators will value the company’s tangible and intangible assets separately. It uses two capitalization rates – intangible and tangible assets return rates. Since it should be used as a last resort, it is a rarity among evaluators in Colorado.
Income approach
The income approach is the primary valuation approach among evaluators. It uses two methods, namely:
- Capitalization of cash flow method
The capitalization of cash flow (CCF) method uses a single period to determine the value of a company. It uses a firm’s benefit stream, dividing it with the capitalization rate to get the fair market value. It is ideal when a company projects long-term and stable cash flows. The valuation company will use recent historical data to project future earnings.
- Discounted cash flow (DCF) method
This multiple-period valuation method uses future cash flows to determine a firm’s value. It discounts the future cash flows to present value using the capitalization rate.
It assumes that the value of a company is its current future projected cash flows over a specific period. A company’s management will provide future projects for the evaluator to calculate a fair value.
Market approach
The market approach compares a company to its peers to determine its value. It uses historical transaction multiples, which are available publicly. An evaluator will use a multiple, multiplying it by the company’s earnings to calculate the fair market value. It uses three methods. They are:
- Guideline transaction method
It uses pricing multiples from the sale of private companies, similar to the subject firm. The evaluator will choose a company with similar economic conditions, operations, and industry. If it is daunting for the evaluator to find an equal company, the evaluator will slice the data by year or geographical location.
- Guideline public company
As the name suggests, it uses multiplies derived from the sale of public companies comparable to the subject company. The evaluator will select companies with similar operations, industry, and financial risks. Since public companies are more significant than private companies, evaluators will adjust the multiples to better-fit private companies.
- Prior transactions method
Evaluators in Colorado will use a company’s previous transactions or acquisitions to determine its value. An evaluator will seek to know the circumstances surrounding prior transactions for best results. It is to ensure they represent current market conditions.
Wiley Financial is a perfect bet for you if you are looking for the best business valuations in Colorado. We serve clients from around Colorado and other towns. Call us today for a consultation.
Benefits of Business Valuation
So, how will you benefit from business valuations in Colorado? Let’s find out.
Access to investors
When looking for extra capital to fund your business, a business valuation report is a prerequisite among many investors. Investors want to know the current and future company’s value to determine whether it’s a viable investment. Understanding your company’s value will enable you to seek investment from ideal investors.
Sale value
Let’s face it, selling your business only happens once. You need to sell it at a price representative of decades of input. We, therefore, recommend having your business evaluated right from inception. It will help you identify areas you can invest in to increase the company’s value.
Understanding the company's position
Business valuation enables the business owner to understand their company’s value and position in respective industries. An evaluator will compare your business to peer companies, calculating the fair value. It also enables you to identify your competition, meaning you can identify areas to improve, increasing your company’s value.
Better decision making
At its fundamental level, business valuation identifies what makes a firm valuable. It helps business owners make decisions that will increase their company’s competitive edge and value. You also identify unprofitable areas, which you can do away with.
Business Valuation Principles
Future profitability
As you’d expect, future profitability determines a company’s current value. The company’s current price should be based on future benefit streams rather than historical performance.
Cash flow
Generally, financial and insurance companies have minimal tangible assets. It means their value is the cash flow from their customers.
Motivation and determination
While the accuracy of a business valuation is crucial, the final market value is dependent on the determination and motivation of involved parties. The best result is when the seller and the buyer agree on a fair price.
Subjectivity vs. objectivity
Business valuation in Colorado involves an objective expenses and revenue review. Likewise, there’s a subjective assessment of what makes one book more valuable than another.
It would help if you had regular valuations to improve your firm’s value and competitive edge. Wiley Financial conducts business valuations in Colorado, assisting companies in making better investment decisions.
