It is a standing joke in the business appraisal profession: the business valuation is out of date the moment it is delivered to the client.
Business valuation has an expiration date
In fact, a key assumption for any business valuation is the date on which it is done. Why is the date so important? Here are a few key reasons:
- Business earnings prospects and the risk it faces change over time, sometimes very significantly.
- The industry sector can undergo changes that directly affect the value of firms competing in it. Major factors are industry consolidation, new government regulations, new and disruptive technologies.
- Investor expectations of return and perception of risk vary over time.
- Investor appetite for acquisitions can change. This in turn affects the market value of businesses. If you pay attention to the public capital markets, you will see how valuation multiples change as investors respond to market conditions.
- Access to capital for firms of certain size or in a specific market can have a great effect on their value.
Whether you conduct a business valuation for a client or assess the value of your own company, the business earnings outlook and risk evaluation are critical to your business appraisal result.
Refresh your business valuation as key assumptions change
Since none of us have a crystal ball, regularly repeated business valuation is essential. It helps you review your earlier assumptions and see what the company is worth at any given time.
Such a review will usually help you identify critical changes in these valuation parameters:
- Revised valuation multiples that reflect the current market conditions for the subject business.
- Discount and capitalization rates that you should be using to value your company.
- Realistic earnings forecasts that are the basis of business valuation, especially when you use the income-based methods such as the Discounted Cash Flow.
When the market uncertainty is especially high, you may want to consider a number of scenarios, each with its own assessment of business earnings outlook and risk. You can then use these scenarios as inputs into your business valuation calculations.
An average of the results, or a range of business values you calculate give you a well considered estimate of what the business is worth – and how business value has changed over time.
Business valuation tools that help you stay current
To make the task of business value reassessment easier, ValuAdder business valuation software is continuously updated to reflect the latest changes in the market:
The valuation multiples in the Market Comps Tool reflect the current values of companies similar to yours.
The discount and capitalization rates let you capture business risk that accurately reflects the current market trends.