DO YOU KNOW HOW MUCH YOUR BUSINESS IS WORTH?
As a business owner, you should know your company’s value. This will help you make informed decisions about your business, whether you’re looking to sell, seeking investment, or planning for succession. Of course, your circumstances will determine the best way to assess your company’s worth.
We’ll explore different methods of valuing a company and how to choose the best one.
What is Business Valuation?
- Business valuation is figuring out how much a business or company is worth in terms of money.
- Most businesses are valued based on their financial health, market share and future development prospects.
Purpose of Business Valuation
- A business valuation can be used for various purposes, including the sale of the business, the merger or acquisition of another business, taxation, buy-sell agreements and estate planning.
- However, the most common reason for business valuation is to support the sale or transfer of business ownership.
Business Valuation Approaches
- The next thing you need to consider is the value itself.
- There are 3 basic approaches to determining value:
- the market approach,
- the income approach, and
- the asset approach.
- Choose the method that works best for your business and situation.
- Once you have selected your method, it is time to gather data.
- This data can include financial statements, market research, and appraisals of tangible assets.
- Collecting positive and negative data is necessary, as this will help you create a realistic model.
- After gathering the data, establish and measure the business’s qualities or weightings to establish a model that reflects the business’s value.
1. The Market Approach
- The market approach looks at your business and compares it to recent sales of similar businesses.
- This is a good way to get a general idea of what your business is worth.
- To get started, gather information on similar businesses that have been sold recently.
- This can be done by searching online, talking to industry experts, or hiring a business appraiser.
- Once you have this information, you can understand what your business is worth.
- The market approach is a great way to get a general idea of your business’s value.
- Still, it’s important to remember that every business is unique. Your business may have aspects that make it more or less valuable than the businesses described in the information you gathered.
2. The Income Approach
- Like the market approach, the income approach looks at your business based on cash flows.
- But this method compares your business’s net income to the net income of similar businesses that have been sold.
- This approach is useful because it excludes the price paid and focuses purely on the business’s ability to generate cash.
- To use the income approach, you must gather your business’s gross and net income over a three-to-five-year period.
- You must divide this number by the price received in similar sales to determine a percentage.
- This percentage can then be used to determine the value of your business.
3. The Asset Approach
- The asset approach focuses on the value of the business’s physical and intangible assets.
- This approach compares the value of the assets to the value of similar businesses that have been sold.
- It’s important to remember that the asset approach to valuing a business can be used differently.
- For example, some firms include operating and non-operating (or inventory) assets, while others only include operating assets.
- To establish your business’s fair market worth, add all its assets and deduct any liabilities.
- This gives your company’s net asset worth a decent starting point for evaluating fair market value.
- Using the asset approach to value your business requires a few considerations.
- First, to only include assets owned by the business.
- Second, some assets may be evaluated at their current market value, while others are determined using historical costs (initial depreciation).
A good accountant can advise you on the best method to use.
The most important thing to remember when valuing your business is that there is no one-size-fits-all answer.
Every business is unique, and there are a variety of factors that can affect its value.
However, by understanding the different valuation methods and using them to assist in your decision-making, you can arrive at a fair and accurate estimate of your business’s worth.
Every business is different, and as such, the difficulties that you face will vary. We offer video consultation via Lawyer Anywhere and can help you navigate the ups and downs of running your own company.