Only 30 percent of all businesses put on the market for sale are actually sold, according to the National Federation of Independent Business.
As a business owner, ascertaining the value of your business is important for a variety of reasons, including business succession, estate tax estimates and loan qualification. There are a number of valuation techniques, ranging from the simple to the very complex. Outlined below are three different methods to placing a value on a business.
This approach calculates the value of all tangible and intangible assets held by the business. It ignores the future earning potential of the company. Thus, a pure asset-based valuation model is often used for companies that are bankrupt or looking to liquidate.
This approach seeks to arrive at a business value by applying a multiple to normalized earnings – for example, earnings adjusted to subtract the owner’s compensation and related expenses. The multiplier can vary substantially, depending on the industry and the outlook for the business.
This approach compares the business to similar businesses that have recently been sold.
Business valuation is not simply a formulaic exercise. For instance, there is value in the business being a “going concern” as opposed to the start-up alternative. Ownership percentage also matters, and purchasing a minority share that has limited control may result in a discount to the actual value. The prospects for the business also impact its value. A greater premium will likely apply to a company engaged in a leading-edge technology than one involved in a mature market.
Placing a value on a small business 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 (such as the value of the company’s reputation).
The true value of anything can only be determined when a willing seller and a willing buyer agree on a price of exchange. As a consequence, any valuation exercise may yield only a rough estimate.
Before moving forward with a business valuation, consider working with legal and tax professionals who are familiar with the process. A qualified business appraiser may also be able to offer some
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