For-profit companies provide value to their owners and investors through direct distribution of profits, through profit retention, and through increases in company value. Retained earnings increase company value through the reinvestment of those earnings into business growth and expansion. The value that you receive as a shareholder or owner depends on how much of the company you own.
If the purpose of a valuation has a legal reason behind it, then you can hire a valuation firm to do a formal, written valuation. This written valuation typically includes the use of several valuation methods, the selection of the best method, and a full explanation for doing so. Therefore, formal written valuations often successfully stand up to court challenges. Reasons for formal valuations include setting up or maintaining an employee stock option plan or buying out an investor or partner.
The valuation method to use for a company depends partly on the business stage, such as startup, revenue-generating or stable. It also depends on the industry, the level of assets, and the cash or profits it generates. Book value, which establishes a base valuation for a company, is shown on the balance sheet and equals the owner’s equity. These valuation techniques provide the best value for a company for internal purposes or in support of the internal transactions that occur, but the true value of a company when selling is how much qualified, willing buyers are willing to pay.
The law requires your corporation to issue shares to its owners and investors as documented representation of their ownership in the company. Your company must keep adequate records showing how many shares each shareholder owns and at what time and for how much was each share purchased. To determine the current value of each share, divide the company’s total value by the number of outstanding shares.
You can hire an appraiser to do an asset-based valuation or, if the reason for your valuation is more informal, you can do it yourself. You must determine the current market value of all the assets your company owns –inventory, accounts receivables, equipment, furniture, buildings and computers and related. You can check with suppliers, asset buyers or financing companies to help you assess pricing.
You can look at announcements in general business and trade publications regarding the sale of other similar businesses in your industry. Use the multiples that these companies sold for to assess your company’s value. For example, if three private companies in your industry sold for two times revenue, you would value your company at two times your company’s revenue. If generally companies sold for three to five times EBITDA — earnings before interest, taxes, depreciation and amortization — then calculate your company’s EBITDA and apply those multiples to get a valuation range.
- Appraisal Economics, Inc.: Tangible Assets [http://www.appraisaleconomics.com/range-of-services/asset-appraisal/tangible-assets/]
- Alpern Rosenthal Accounting Firm: How the Balance Sheet Affects Business Valuation [http://www.alpern.com/balance-sheet-business-valuation]
- University of Michigan: Mergers and Acquisitions – A Beginner’s Guide [http://webuser.bus.umich.edu/Organizations/FinanceClub/resources/m_a-guide.doc]