What is the Value of Your Business?
According to Silver Grove Financial Group, Inc., in the first quarter of 2015, nearly 2,000 small businesses were sold. The median sale price was $200,000, up from $175,000 the year before.
As a business owner, it’s important to be able to ascertain the value of your business when to comes to business succession, estate tax estimates, and qualifying for a loan.
There are a number of valuation techniques to be employed. Below, we’ve outlined three different possible approaches to estimating the value of a business:
- Asset Based. This method calculates the value of all tangible and intangible assets held by the business. This approach ignores the future earning a potential of the company, so it is often used for companies that are bankrupt or are thinking about liquidating.
- Earnings Based. This seeks to arrive at a business’s value by applying a multiple to normalized earnings, i.e., earnings adjusted to subtract owner’s compensation and related expenses. The multiplier can vary substantially, depending on the industry and the outlook for the business.
- Market Based. This technique simply compares the business to recent sales of similar companies.
It’s not easy to determine the value of a business, as it’s not just a formulaic exercise. For example, there is a value to the business of being a “going concern” as opposed to the start-up alternative. Ownership percentage will also factor in; purchasing a minority share that has limited control may result in a discount to the actual value.
Valuing a small business, especially, is not an exact science. Some aspect of the valuation may be debatable, such as the remaining life expectancy of a machine, while other aspects may be positively subjective, like the value of the company’s reputation in the community.
Willing Seller & Buyer
When it comes to anything, true value can only be determined when there exists a willing seller and a willing buyer that agree on the price of the exchange. Thus, any valuation exercise may yield only a rough estimate.
Prior to moving forward with a business valuation, consider working with legal and tax professionals who are familiar with the process. Also, a qualified business appraiser may be able to provide some valuable insight.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance references is historical and is no guarantee of future results.