Business valuation is the process of assigning the economic value of your company. The process is important if you want to sell or buy a commerce. For the sellers, they want it to be as high as possible, whereas for the buyer they want the opposite. Because of the innate biases of both sides, an outsider should do a business valuation to give a more objective analysis. Here are the methods used to assess the value of a business.
Multiplier or Market Value Approach:
The valuator estimates the value of the business through comparison with similar businesses that have been previously sold. It uses the industry average sales figure in assessing its assets. By simply multiplying the constant with the annual gross sales of the company, you can arrive at the approximate price of the business.
Asset Valuation:
The method is applicable if you are in line with retailing and manufacturing industries, as they have more physical assets for inventory. The principle of the business valuation is that the value is equal to the sum of its parts. By summing up all your assets and subtracting the existing liabilities, you get the estimated price of your company.
Capitalized Earning Approach:
The business valuation depends on the return of investments that the buyer expects. The method relies on the prediction of future earnings based either on the average past earnings or on the trend set of the current earnings. Generally, small businesses can assign a 25% return rate and 8% for no risk investments.
Income Approach:
The income approach places high value on intangibles like the company’s reputation, trademark, branding and the size and quality of customer base, and less on physical assets. Although this business valuation technique is quite hard and can create disputes, a rapidly growing business seems very attractive to investors.
Whatever method you use, be sure to consult a credible financial analyst before buying or selling a business.
Craig acts as a strategic business and financial mentor for business owners and has written three critically acclaimed books educating business owners on business management, business valuation and asset protection. Craig has recently been invited to complete a PhD in Business Succession Planning.
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