Valuation Methods to Determine How Much Your Business is Worth
- Author Jessica Fialkovich
- Published May 29, 2019
- Word count 588
How Much Is A Business Worth? Buyers and sellers alike are primarily concerned with how a company is valued. Unfortunately, there is not one simple explanation because valuation is an art, not a science. There are multiple methods for determining the value of a business prior to sale, and we’ve outlined them below.
First, let’s look at the four different types of value that can be determined for a small business.
Fair market value is the price a willing buyer would pay a willing seller, where both parties have reasonable knowledge of relevant facts.
Intrinsic value is based on stock values that investors would consider.
Fair value is based on legal standards of valuation and may be used in divorce proceedings or similar division of mutual assets circumstances.
Investment value is specific to certain buyers and what they are willing to pay. This value can exceed the fair market value.
For the purposes of this discussion, we will examine how to arrive at the fair market value of a small business using three generally accepted approaches to business valuation.
THE ASSET APPROACH. The asset approach values the assets of a small business minus liabilities using methods like book value. These values usually do not translate to the market value of most operating businesses, therefore the asset approach does not properly represent the value of an ongoing business with positive earnings.
THE MARKET APPROACH. The market approach uses comparable sales data to determine the value of a company of a like business in size and industry. There are multiple trustworthy databases where appraisers can find multiples of gross sales and earnings to compare to a business. This method is reliable in most cases and is a strong indicator of fair market value.
THE INCOME APPROACH. The income approach determines the present value of the income stream it will bring to a buyer using several complex calculation methods. This approach is also a strong indicator of a business’s fair market value. These methods use future projections of growth to identify what the business may be worth, and oftentimes, historical earnings are a good indicator of future earnings. So essentially, in the income approach a business is worth a multiple of past earnings.
How is a Multiple Determined? In small business mergers & acquisitions, the multiple will likely be between 1-3. For larger companies, with earnings before interest, taxes, depreciation, and amortization greater than $1M, the multiple can be between 4 and 6. Multiples generally grow with business size, quality, and the verifiability of the owner’s benefit.
Remember when we said, "Valuation is an art, not a science?" That’s because all of these business valuation approaches aside, the same business can be valued differently by each buyer. And a business’s valuation is dependent on a number of factors like the location, size, competition, growth rates, industry trends, quality of books, ease of transfer, control issues, time available to sell, and the terms of the sale - and this isn’t even an all inclusive list.
If you’re thinking about a future sale, and would like to answer the question, "How much is my business worth?" Then we suggest you work with a professional business broker or transactional valuation specialist to provide you with a price opinion. As you can see, business valuation is complex, and working with a professional will ensure you understand the appropriate fair market value you can receive from the sale of your business.
To learn more about business valuation, visit our website below.
Jessica Fialkovich is an M&A expert, and award-winning business owner whose mission is to help business owners exit successfully. Over the past 5 years, Jessica has overseen $65 million in transactions and mentored 1,900+ business owners on buying and selling a business. Currently, she’s the President of Transworld Business Advisors - Rocky Mountain, Colorado’s top business brokerage firm.
Article source: https://articlebiz.comRate article
Article comments
There are no posted comments.
Related articles
- Enhancing Home Security with Aluminum Shutters: A Focus on Weatherwell Elite
- 5 Easy Ways to Make Oral Hygiene Fun for the Whole Family
- Transforming Plastic Extrusion Machines into Recycling Powerhouses
- Unraveling the Potential of Plastic Extrusion Machines
- The Rise of Plastic Recycling Machines: A Step Towards Sustainability
- Strawberry Cheesecake Ice Cream: OMG! Unreal!
- The Advantages of Using Professional Home Cleaners in Ilford
- 8 Compelling Reasons to Hire Professional Home Cleaners
- Send Money to Tanzania: Effortless Transfers with SafariRemit
- Stylish Savings: 10 Frugal Ways to Stay Fashionable in 2024
- Fly Cheap With FlightPapa To Any City
- How Collaborating with a Software Development Company Can Propel Your Business Forward
- A Comprehensive Guide to Choosing the Best Hair Transplant Method
- 15 Frugal Tips for a Memorable Wedding Day
- Credit Union vs. Bank
- Explore the Advantages of Renewable Energy: Wind, Solar, Biomass, Hydropower and Geothermal Energy
- Frugal Nutrition: How to Eat Healthy on a Budget
- Fintechzoom Richard Mille
- Who owns the most Bitcoin?
- Fintechzoom IBM Stock: Powerful!
- Building a Professional Website on a Budget: Using Free Tools like WordPress and AI
- Navigating Vietnam's Tourist Immigration: Challenges and Solutions
- Bitcoin FintechZoom
- Cost-Effective Gardening: Tips for Enhancing Your Garden on a Budget
- Steve Wozniak: WOZ
- Keeping Your Garage Door Running Smoothly: A Guide to Drum Replacement with GarageDoorMagnolia
- When Your Garage Door Goes Rogue: Off-Track Repair in Tacoma and Seattle
- Same Day Service? Kiki Garage Door Repairs Your Garage Door Fast in Sammamish, WA
- Cost-Effective Strategies for Business Owners in 2024: Maintaining Efficiency Without Reducing Staff
- Navigating Compliance for Personal and Professional Contributions