Managing Attorney
You’ve decided to buy or sell a Texas business, but how much is it really worth? As a seller, you want the maximum amount that reflects the hard work you’ve invested to make your company a success. Conversely, if you’re buying a business, you want a fair deal which will allow you to turn a profit on the company you are purchasing in the shortest amount of time.
Buyers and sellers alike need to understand the various business valuation methods, how they are applied, and the legal implications of each one. Find out why so many Texas business clients trust the seasoned legal counsel of Capstone Legal Strategies.
The Elements of Business Valuation
Determining the value of a business requires taking various factors into account, each of which must be properly weighed to give the buyer or seller a full picture of what the company is worth. Those factors include:
- Financial performance: The financial performance of a company can be ascertained by considering its profit margins, gross revenues, and fiscal vitality over a period of time.
- Competition: By evaluating the competition that is set against the business, its overall health and value may be better understood.
- Market environment: How well a company is doing must be measured against the greater market in which it exists, and more specifically which economic sector it is in.
- Potential for growth: A newer business can still be valued in terms of its growth potential, as can any company which is set to expand into new markets.
- Intangible assets: Not all of a company’s value can be expressed in dollar figures, with reputation, brand recognition, and intellectual property holdings being key intangible assets.
- Efficiency: If there is evidence that the company is cutting unnecessary expenses and increasing productivity, it may fetch a higher value.
Valuation Methods for Your Texas Business
As you consider buying or selling a company, you should keep in mind some of the most commonly used valuation methods. Among them are:
- Book value method: Businesses with less intangible value than others (e.g. brand recognition) may prefer this simple approach, which subtracts total liabilities from the company’s total assets. It is also likely the lowest valuation.
- Market value method: If there is sufficient data on comparable businesses in the area, one can simply look at sales of other, similar companies and compare them to the target company.
- Asset-based method: This approach examines a business by considering the fair market value of its assets minus its liabilities, especially useful for Texas manufacturing and real estate businesses.
- Discounted cash flow method: This approach estimates future cash flows and then discounts them to the current value, accounting for both future risks and growth.
- Earnings multiplier method: A business with stable earnings can use a multiple of those earnings to determine its value, applying the EBITDA metric.
Legal Implications of Texas Business Valuation
Regardless of which business valuation you ultimately settle on, there are legal issues to keep in mind, including:
- Due diligence: Proper due diligence should be conducted first to help determine which valuation method is going to be best. Any legal agreements should provide as much flexibility as possible to conduct sufficient due diligence.
- Written agreements: Purchase and sale agreements, along with other written documents, will govern each phase of the business transaction. These agreements should make it abundantly clear which valuation method is chosen.
- Full and fair disclosures: Likewise, these agreements must obligate the seller of the company to fully and fairly disclose all relevant information that will be factored into the valuation. A valuation is only as useful as the completeness of the information provided.
Let an Experienced Texas Business Law Firm Guide You
When you retain Capstone Legal Strategies, we apply both our legal and business experience to serve your interests as a buyer or seller. We can walk you through each step of the transaction and ensure you have as full an understanding as possible of the value of your purchase or sale. Connect with us today to schedule your consultation.