There are many reasons to have an up-to-date business valuation. You may need debt or equity financing for expansion or due to cash flow problems. Potential financiers or investors will want to see that the business has sufficient worth. You may be adding shareholders (or one or more shareholders may wish a buyout). In this case, share value will need to be determined.
How much your business is worth depends on many factors, from the current state of the economy through your business’s balance sheet. If for example, similar businesses in your area have recently sold, the value of your business will be determined in large part by the selling price of the previous sales.
Asset-Based Approaches 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’s 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. In a corporation, all assets are owned by the company and would normally be included in a sale of the business. Assets in a sole proprietorship exist in the name of the owner and separating assets from business and personal use can be difficult.
A sole proprietor in a lawn care business may use various pieces of lawn care equipment for both business and personal use. A potential purchaser of the business would need to sort out which assets the owner intends to sell as part of the business.
Earning Value Approaches are predicated on the idea that a business’s true value lies in its ability to produce wealth in the future.
The most common earning value approach is Capitalizing Past Earning.
With this approach, a valuator determines an expected level of cash flow for the company using a company’s record of past earnings, normalizes them for unusual revenue or expenses, and multiplies the expected normalized cash flows by a capitalization factor. The capitalization factor is a reflection of what rate of return a reasonable purchaser would expect on the investment, as well as a measure of the risk that the expected earnings will not be achieved.
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.
To ensure that you set and get the best price when you’re selling a business, I recommend getting a business valuation done by a professional, such as a Chartered Business Valuator (CBV). A Business Valuator (or anyone valuating your business such as an accountant) will use a variety of business valuation methods to determine a fair price for your business.
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