If the tools and choices confronting you in business valuation seem confusing, take heart – you can get through this by following a number of straightforward steps.
Step 1: Gather the relevant data
Just like any project, business appraisal requires that you take the time to plan it. So the first step is to gather together the information you will need to use in your business valuation. Most important are the financial statements for the company. These may include historic income statements, balance sheets, as well we the financial forecasts for the company.
Step 2: Financial statement adjustment
Once this information is available, you would need to review and adjust the financial statements. This second step is often called the financial statement reconstruction or recasting. The idea is that the financials from the company’s books may not represent the true earning power of the business. Since the ability of the business to produce earnings is key to its appraisal, the financial statement adjustments are done to reveal the company’s income generating capacity in a clear and convincing way.
Step 3: Choose your business valuation methods
The company’s financial numbers help you develop a number of inputs that can be used in the actual valuation calculations. The next step is to choose the valuation methods to use in appraising the company. Each method requires that you provide certain inputs from the previous step.
Step 4: Run valuation calculations with each method
At this point you can run a number of valuation methods to come up with an estimate of business value. Usually, the results you get from the different methods vary.
Step 5: Come up with the overall business value
So the next step is to combine them in order to come up with an idea of what the business is worth. One way to conclude the valuation is to calculate an average of the results you get from the methods you selected. Another is to report your valuation as a range from low to high.