The Ultimate Business Valuation - Choosing Metrics in 2023

February 2023

Are you a business owner thinking about selling your business? Or are you interested in buying one? Either way, it's essential to understand the process of business valuation. Valuation is the process of determining the economic value of a company, and it's a critical step in buying, selling, or financing a business.

During the valuation process, various factors, including a company's financial records, assets, and non-financial factors, such as market trends and industry regulations, are considered. It's a complex process, but it is necessary to ensure both buyers and sellers get a fair deal out of the sale. Or to demonstrate to investors and stakeholders the value of their investment.

For business owners, valuations are also crucial for strategic planning. Understanding the actual value of your business can help you forecast and calculate your return on investment when it comes time to sell.

When buying or selling a business in Las Vegas, you must understand the nuances of the local market to achieve your goals, whether you're a buyer or a seller. Working with a professional agency like First Choice Business Brokers can help you navigate the valuation process and ensure a successful transaction.

A business broker advisor can help you to better understand how local market trends and projections can be applied in your business valuation.

For Example:  

Cushman and Wakefield Publication LAS VEGAS MARKETBEAT REPORTS: by Jeff Cooledge indicates figures, trends, and predictions in Las Vegas for Office Space, Industrial Market, and Retail Economic Projections

https://www.cushmanwakefield.com/en/united-states/insights/us-marketbeats/las-vegas-marketbeats

A brief summary of outcomes in the above publication:

Office Space in Las Vegas

As of Q1 2023, there is an estimated 2 million square feet of active tenant requirements for office spaces in Las Vegas. A significant portion, around 50%, of these tenants are searching for office spaces between 3,000-7,000 square feet in the Southwest, Henderson, and Central East submarkets, which are currently the most desirable areas. The most active industries seeking office space are Professional & Business Services and Technology, accounting for almost 1 million square feet of active tenant requirements.

Currently, eight office projects are under construction, with six slated to be completed by the end of 2023. These six projects, which are only 8% pre-leased at the moment, will add over 381,000 square feet of office space to the Las Vegas market. As the completion date of these projects approaches, pre-leasing is expected to increase, leading to stronger occupancy rates throughout the year.

The Industrial Market

The industrial market in Las Vegas is seeing strong tenant activity despite economic instability and capital market volatility concerns. The vacancy rates are not yet showing any significant increase. However, landlords are keeping a close watch on tenant payments and delinquencies.

Although the demand for industrial land is still strong, prices are beginning to soften. With the increase in debt costs and limited equity pool, land transactions are expected to slow down in the first half of 2023. Landowners who don't need to sell immediately will likely hold onto their land until prices stabilize rather than sell at a lower price. However, there will continue to be interest in shovel-ready or entitled land from fee developers and end-users.

Retail

In Q4 2022, nonfarm employment in Las Vegas grew by 47,200 jobs or 4.6% year-over-year, with the service-producing sector adding 37,350 jobs (4.0% YOY) and leisure & hospitality adding 17,620 jobs (6.6% YOY). The monthly unemployment rate decreased from 6.0% in 2021 to 5.2% and is currently 150 basis points higher than the U.S. unemployment rate of 3.7%. Nine of the twelve employment sectors are expected to grow at a combined rate of 4.2% in 2023. The leisure & hospitality sector is forecasted to grow by 3.2%, and the service-producing sector is forecasted to grow by 1.5%.

Las Vegas's economy, measured by the 2022 gross regional product of $118.8 billion, is forecasted to grow 3.6% in 2023 and 4.6% in 2024, surpassing its 10-year average of 2.9%. These positive economic indicators bode well for the retail Market in Las Vegas. The strong job growth and low unemployment rate suggest that consumer spending will continue to rise, bolstering demand for retail space.

Armed with knowledge, a business advisor from First Choice Business Brokers will help you interpret such forecasts and how to leverage applicable data into the business valuation to maximize its value.

Methods of Valuation

There are several methods for business valuation, including:

● Asset-based: The asset-based valuation method calculates a business's value based on its assets' value. There are two subgroups - the going concern approach and the liquidation approach.

● Income-based: Income-based valuation calculates a business's value based on its income generation. There are two common approaches: the discounted cash flow (DCF) and the capitalization of earnings method.

● Market-based valuation methods: Market-based valuation, also known as the market approach, uses the price of similar businesses sold on the market to estimate the value of the business. The two most common market-based valuation methods are the guideline public company method and the transaction method.

In conclusion, choosing the proper valuation method is crucial for business owners who want to sell or buy a business. By considering the nature of the business and the current economic situation, business owners can choose the most appropriate method to ensure a fair deal. A professional agency such as First Choice Business Brokers can help guide business owners through the process and even combine different methods for a customized approach.

Valuation is a critical aspect of business, and understanding the different valuation methods can help business owners make informed decisions. By clearly understanding a business's value, business owners can forecast and calculate their ROI accurately. Whether you're buying or selling a business, having a deep understanding of the valuation process is vital to make the most of your investment.