Business valuation is a set of steps used to assess the economic worth of an owner’s interest in a business. There are many different valuation methods that can be used. If you are ready to sell your business, you need to learn as much as you can about these different valuation methods. The three most used approaches to valuation are asset-based, income-based and market-based. This guide will take a quick look at all three methods and why valuation is important for the sale of a business.
Valuating a business gives you an idea of what it is worth. This knowledge can help you close a sale. You can’t expect a buyer to pay way more than your business is worth, and you shouldn’t have to settle for a low-ball price. A valuation is important because it takes the guesswork out of selling your business. You will know exactly what kind of money you should get.
The asset-based approach considers the assets of the business. The value of the business is then based on the price of the assets. The formula for this approach is value of total assets minus total liabilities. There is some room for interpretation when it comes to assets and liabilities that need to be included.
To put it simply, this approach strives to define what it would cost to create another business just like the business you are selling. This approach isn’t perfect because it can be hard to value an intangible asset. This valuation method isn’t right for all businesses.
The income-based approach focuses on how much money the company produces for the owners. This value is estimated by looking at the net operating income of the business and dividing it by the capitalization rate. Often this approach is used for real estate properties, but it can work for other types of businesses as well.
This approach, like the asset-based approach, has its shortfalls. It doesn’t always look at the condition of the business. Instead, this method only looks at the cash flow into the business. It’s a great way to get a quick snapshot of the business’s worth, but it isn’t an all-encompassing look at the value of the company.
The third common valuation method is the market-based approach. This method investigates other business in the same or a similar industry that have been recently sold. The value of your business will be based on the average value of comparable businesses in the market. Of course, other factors of your business have to be considered in this approach. Adjustments are made to the value based on the size, quantity and quality of your business compared to other businesses.
This approach is not perfect, either. Sometimes your company may be compared to a business that was sold recently at an unreasonably low price because the owner did not take the time to have it properly valuated. The market-based approach can be useful for some businesses.
Work With Professionals
When it comes down to it, none of these valuation approaches is completely perfect. It is hard to figure out the value of a business because there are so many different considerations to make. Not only are there assets you can see and touch, but there are also intangible assets that make your business worth more, but are hard to explain. When you are ready to sell your business, you have to get it valuated. If you work with a professional through this process, you will be able to get a better understanding of the worth of your company.
Work with a team of professionals to make sure you get the most accurate value of your business. Don’t sell your business for too little. Instead, use one of the above methods or a combination of the methods to properly value your business for sale.
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