Find the Right Method to Determine the Value of Your Business

Want to find the right method to determine the value of your business? While there are a number of ways, there are three major ways to find the value of a business when you are considering purchasing or selling a business.

Method 1: Asset-based Method

The asset-looks at the assets and liabilities in your company. By finding the difference between the assets and liabilities, you calculate the value of your business. Some aspects of your business add value to your company. Items that add value are assets. Many things add debt to your company, otherwise called liabilities. Liabilities are debts which your company owes to creditors. Subtract liabilities from the assets to achieve the valuation of your company.

You can find the book value for your business using the asset-based method. Your book value is balance sheet equity for the lender. The book value must be the lowest price you wish to sell to your company. Responsible debt management will help you raise your net assets.

Consider using an asset-based method if you need to sell your business quickly. If you're going to sell debts, you can save time and money by offering a book value.

Method 2: Market

The market approach compares the company with businesses like the ones that have already sold. The value of your company is market-based. Look at data from the sale prices of comparable companies. Compare your value to companies like yours.

The market approach produces a sum that is similar to the fair market value. Fair market value means that what consumers are willing to pay is your small business net worth. You have to raise or decrease the price of your service, depending on what purchasers pay.

Market-based methods compare similar companies' recent selling prices.

Such market valuation approaches are often included in professional business evaluations:

  • Guidance on the process of the publicly-traded company
  • Comparative transaction method

Method 3: Income

The income method looks at the financial background of your company. You use your books to convince customers that your company is a low-risk, profitable investment.

A buyer also takes out a small business loan to buy a business. Tell the borrower that your company will produce ample income to pay back the loan. The willingness to pay debts represents lower risks than large-scale debt holders. The more successful the company is in debt service, the more precious it is.

You'll look at your past profits and cash flow using the income method. Project the future profits and the company's debts using your profit and loss statement for small businesses. You can find your Small Business value using the estimates.

Other Business Valuation Methodologies that can be considered:

Historical Earnings Valuation. The current value of a business determines its gross income, the ability to repay debt, and the capitalization of cash flow or earnings. If your company fails to get enough money to pay bills, its value will decline. Conversely, fast debt reduction and holding a healthy cash flow increase the value of your company. Using both of these variables when you assess the historical value of your company earnings.

Relative Valuation. You calculate, using the relative valuation process, how much a comparable company would offer if it were sold. This compares the value of the assets of your company to the value of comparable assets and allows you a fair price to pay.

Future Maintainable Earnings Valuation. The sustainability of your company in the future determines its value today. When profits are projected to stay stable, you can use the future sustainable earnings valuation approach for valuing a company. To measure the potential sustainable earnings value of your company, assess its past three years ' revenue, expenses, income, and gross profits. Such statistics help you forecast the future and have a valuation for your company today.

Discount Cash Flow Valuation. When earnings are not expected to stay stable in the future, using the approach of valuing discount cash flows. It takes the potential net cash flows of your company and discounts them to current values. For those statistics, you know the company's discounted cash flow value and how much money the business assets are likely to make in the future. 

Improving your small business valuation. The value of your company is a flexible figure. Buyers have their own views as to how they value a company.

A Company's value takes time and careful planning to build to a favorable level. Maintain the types of business records which your company uses thoroughly. The reports may contain statements from the banks and financial institutions. Your books help to project costs and profits that purchasers may face. The more structured your books are, the greater the likelihood that customers will have to see your interest. You can use accounting software for small businesses to conveniently keep track of the company's finances.

It's a good idea to do valuation in your own business. But, you can also consult a qualified business appraisal appraiser. An appraiser will offer useful advice to help you make the most of your transaction.

Category: Accountants

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