Business Valuation
How It Works
Many factors are considered when arriving at the market value of a business. Basically, however, market value takes into consideration the fair market value of the businesses’ assets and the ability of the business to earn profits and generate cash flow. In very broad terms value is determined by the rate of return one expects to get on one’s investment, not unlike money in a savings account or stock portfolio.
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Most businesses are sold as “asset sales” versus stock transfers. (Asset sales offer much less risk for a buyer, as any “hidden” liabilities are the responsibility of the seller.) Consequently, business owners will probably retain certain assets and may pay certain bills and the company’s financial information must be adjusted for these items. Typical examples of assets retained are cash in the bank, vehicles, life insurance policies, etc. Additionally, in order to properly value a business, the company’s financial reports for tax purposes must be adjusted to reflect the true financial performance of the business. Tax charges such as excess depreciation or charges for “extra” company vehicles must be added back to taxable income. These are just a few of the adjustments and considerations taken into account in order to value a business.
Figuring Your Value
Once these adjustments have been taken into account, there are generally two ways to arrive at the value of a small business. One method uses the company’s ability to generate sales, cash flow and/or profits. The second method is to value the company based on its assets. The method used depends on the condition of the business and the industry it is in. However, a business, like any other asset, is worth what a buyer is willing to pay and what an owner is willing to accept. Beltway Business Brokerage is qualified to advise you on the value of your business.
