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The Four Types of Business Valuations

There are many reasons for getting a Business Valuation, from the outright Sale of the business, to Buy-Sell agreements, to Mergers, or even Liquidation in the worst case.  And just like getting an appraisal for a home mortgage financing, there are different types of valuations depending on the intended use of the report.  Here are the 4 most common types of valuations.

1. Asset Sale Value

The first and probably most commonly used type of Valuation is the Asset Sale Valuation.  This Valuation is most commonly used to buy or sell a business under $10M in sales.  In this type of transaction, the seller keeps the liquid assets (typically cash and receivables) and also retains any debt that the company has.  The new buyer is creating a new business entity that starts debt-free, making it easier to get financing for the purchase.  The sale includes all hard assets – inventory, equipment, furniture, fixtures – and also intangible assets such as the existing customer base and Goodwill.  We will talk about Goodwill in our next blog.

2. Equity Value

The next type of Valuation is the Equity Valuation, which is most commonly used for Buy/Sell agreements, estate tax returns, marriage or partner dissolution and special cases involving contracts or licenses that are included in the transfer.  The method of calculating the Equity Value of a company starts with the Asset Sale Value, then adds back the liquid assets and subtracts out all short and long-term liabilities.  In an Equity sale, the existing business continues in its current legal form.

3. Enterprise Value

For the valuation of mid-sized companies, over $10M in sales, the Enterprise Value is often used.  This value is often used in Mergers and Acquisitions (M&A) to compare the values of companies that may vary significantly in size, debt load and/or structure.  The method of calculating this value is to take the Equity Value, add back the Long-term debt and subtract the Cash on hand.  The Enterprise Value differs from the Equity Value based on the difference between Cash on hand and Long-term debt. 

4. Liquidation Value

The last of the four primary methods of valuation is the Liquidation Value.  This is most commonly used when dissolving the company or preparing it for a reorganization, and bankruptcy.  In this situation, the value is simply the Fair Market Value of all identified Tangible Assets minus the currents Debts.  In this case, Fair Market Value is typically priced at “Fire-Sale” levels, as in these situations, selling the assets quickly is usually preferred. 

If you would like some help learning the value of your business for any reason, let’s sit down and talk about the strengths and opportunities in your business. Our business valuation reports will give you each of these values in one comprehensive report. Or if you are more of a do-it-yourselfer, you can take our free Business Assessment to get a view of where you are on the path to maximum value.

Author: Mark McNulty, Business Coach