The value of your business depends on many factors, from the current state of the economy to your business’s balance sheet. Three of the most common ways to determine the value of a business are asset-based valuations, earnings value approaches, and market based valuations.
Asset-based approach business valuation methods total up all of 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.
Earnings value approach business valuation methods are predicated on the idea that a business’s true value lies in its ability to produce cash in the future. You 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. You then normalize the earnings for unusual revenue or expenses, add back any seller’s discretionary expenses, and then multiply the expected normalized cash flows by a capitalization factor or earnings multiple. So what capitalization factor or earnings multiple do you use? This is highly dependent on the industry of the business, its strength in the market, and its future prospects.
Market value approaches to a 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.
Sometimes the best way to set the asking price of a business is to use a combination of business valuation methods.
Setting the price which you will list your business for sale will have a huge impact of the final value you will ultimately receive. You want to avoid leaving any money on the table, while balancing overpricing the business and having it become a stale listing.
If you would like a complimentary business pricing opinion or a more through business valuation, contact the business experts at 1-800-BIZ-BROKER.
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