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.
Asset-Based Method
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.
Earnings-Based Method
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.
Market-Based Method
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
valuable insight.
Actis Wealth Management
www.actiswealth.com