Business Valuation. What is my business worth?

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How much your business is worth depends on many factors, from the current state of the economy through your business’s balance sheet.

Business owners should probably NOT do their own business valuation. This is too much like asking a mother how talented her child is. Neither the business owner nor the mother has the necessary distance to step back and answer the question objectively.

Here are 3 of the most common ways to determine the value of a business:

1) Asset-based approaches

Basically these business valuation methods total up all the investments in the business. Asset-based business valuations can be done on a going concern or on a liquidation basis.

  • A going concern asset-based approach lists the business net balance sheet value of its assets and subtracts the value of its liabilities.
  • A liquidation asset-based approach determines the net cash that would be received if all assets were sold and liabilities paid off.

Using the asset-based approach to value a sole proprietorship is more difficult.

2) Earning value approaches

These business valuation methods are predicated on the idea that a business’s true value lies in its ability to produce cash in the future and then apply a capitalization factor or some multiple of earnings to get to a final sales price.

With this approach, you determine an expected level of cash flow for the company using a company’s record of past earnings, normalize them for unusual revenue or expenses, add back any seller’s discretionary expenses (Call a re-casted financial statement or Seller’s Discretionary Earnings) and multiply the expected normalized cash flows by a capitalization factor or earnings multiple.

So what multiple do you use?  This is highly dependent on the industry of the business, its strength in the market, and its future prospects.

3) Market value approaches

Market value approaches to business valuation attempt to establish the value of your business by comparing your business to similar businesses that have recently sold. Obviously, this method is only going to work well if there are a sufficient number of similar businesses to compare.


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