As you are already aware, a business valuation is a widely used process, in economics and business, to determine the economic value of a company's business assets or shares.
It also finds the fair value of a business for reasons like business partnership, investments, taxation etc.
But, it is also necessary to know the business valuation time period or how long a business valuation takes.
6 Common Business Valuation Methods
There are numerous ways to conduct a business valuation. The 6 common business valuation methods include,
- Market capitalisation
It is the simplest method amongst all the business valuation models. Calculation of market capitalisation is by,
multiplying the company's share prices with its total number of shares/assets.
- Times revenue method
Under the time revenue method, the number of revenues generated by the company in a certain period of time is applied to a multiplier.
- Earnings multiple model
The model gives the real and accurate picture of the value of the company as it uses the comapany's profits rather than the sales revenue.
- Discounted cash flow (DCF) method
The DCF method is based on the furture projections, to determine the current market value of the company.
- Book value method
Book value shows the shareholder's equity as shown on the balance sheet of the company.
- Liquidation value
Liquidation value is the net cash that a company will receive if the company is liquidated and the liabilities are paid off.
How Long Does It Take To Conduct A Business Valuation?
Without further ado, let's dive into the most unanswered and wondered query regarding business valuation, that is, how long does it take to value your business.
A worthy business valuation that you could rely on requires careful and thorough analysis. The time required depends on many other factors.
A potential business valuation prepared by a competent prefessional will require a hard 20 to 40 hours (maximum). But, a business valuaiton consultation or calculation of business valuation may take less time period.
If the appraiser has received all the information required, then it takes 30 to 45 days for the business valuation.
4 Factors Influencing Business Valuation
4 main factors influences the soecific time period of the business valuation. They are -
- Availability of necessary documents
- Size of the company
- Accessibility and availability of the owner
- Scope of adjustments needed
- Availability of necessary documents
This is one of the greatest hindrances to the time taken for business valuation. The sooner the financial statements are provided, the sooner the calcualtions are done. It barely takes 45 days, thereafter.
- Size of the company
The size and complexity of the business influences the time taken for business valuation. A small and two or three tier businesses have easier business calculation than a multi-tiered business.
- Accessibilty and Autonomy
The accessibilty and autonomy of the owner of the business also affects the time taken for business valuation.
When the appraiser receives prompt and swift responses from the owner of the business, the valuaiton processes are much more efficient and time-effective.
- Scope of adjustments needed
If the financial statements are inconsistent and irregualr, then the investigation and alignment before the accurate valuation takes further time.
How Often Should You Do Your Business Valuation?
This must be the most common question that comes to your mind, when you take a deep dive into business valuation.
There is no right answer!
In fact, there are multiple factors that should be considered in order to know how often should your business valaution be performed.
Factor 1: Cash Flow And Profitability
If your business does not produce enough cash flow for the owners, then your frequency of business valuation can be reduced.
On the other hand, if your business produces enough cash flow and profit, then there is more financial statements at hand that need calcualtions and appraisals on a regular basis.
Factor 2: Time Until Exit
Business valuations help to determine the key drivers of the business. It shows you if you are at the end of the business or not. This information helps to understand if you are close to selling the business.
So, if you find your business far away from the exit, then a less regular business valuation suffices.
If your business is expected to exit in 5 years, then more frequent business valuations to make sure of the increasing value of the business is mandatory.
Factor 3: Industry Dynamics
Businesses working on stable industries like consumer staples are less likely to have major swings due to industry trends.
But businesses like healthcare or technology which have constant change in trends, have more swings in value and need more frequent business valuations to understand the industry trends.
Factor 4: Concentration Risks
Small businesses, with a lot of swings in value, tend to have small customer ranges, or the concentration is limtied to a particular geographic market etc.
More the concentration risks, the more the business is volatile. More the volatality, requires frequent business valuations.
Factor 5: Having Multiple Owners
If your business is owned by multiple owners, then it is advised to conduct frequent business valuations.
This will help the multiple owners to be on the same page as the others with regard to pricing expectations etc.
Frequent business valuations also avoids shareholder disputes and litigations.
| Factors Valuation frequency | ||
| Cash flow Higher More often | ||
| Time until exit Shorter More often | ||
| Industry dynamics Less stable More often | ||
| Concentration risks Higher More often | ||
| Multiple Owners Yes Annually |
Conclusion
It is commonly suggested that business valuation can be done once a year. If necessary, you can dial in a professional every two years for more accurate valuation.
