Business Evaluation – Confidential Evaluation
A business valuation is a process for determining the economic value of an owner’s interest in the business. In essence, it is the calculated cost of all tangible and intangible assets that provide an appropriate listing price when selling a business. The common question is, however, how does one do a business valuation?
Methods of Business Valuation
As expected, there is not just one way to value a business. In fact, some sources show up to seven different methods of calculating a business valuation. The thing is, there is no one right way – but rather the way that is right for you. To determine that, let’s explore the three most common methods for calculating the value of your business.
Market Value
This is considered the most subjective approach because it calculates the worth of your business in comparison to similar businesses that have been recently sold. Of course, this method works best if one is able to access enough market data about competitors who sold recently.
Asset-based Valuation
This approach considers, as the name suggests, the business’s total net asset value, minus the value of the liabilities – according to the balance sheet. There are two options: 1) a formula that uses the business’s current total equity; 2) a formula that accounts for the value of the assets once they have been liquidated.
ROI-based Valuation
Finally, there is the ROI-based or “return on investment,” which is the most practical approach. This method is absolutely subject to the state of the market. In this case, you must be able to present the reasoning for your listing price. You may be looking at a multiple of your net profits when you add back or reclassify expenses you have that the new owner will not incur, like your salary, your cell phone, and maybe your car allowance.
There is a simple equation for a partial sale: divide the amount desired for the entire company by the percentage offered for sale. For instance, if you are asking for $250,000 in exchange for 25% of the business, you have valued the business at $1 million. In doing so, you need to be prepared to answer a number of questions. For instance, 1) How long until I recover my initial investment?; 2) What will the return look like?; 3) Is the number realistic?
Tying It All Together
What is the main thing all of these valuation methods have in common? A tie to competitive pricing. At the end of the day, you cannot value your business astronomically less or more than what the market is showing for businesses of your size in your industry. If you are still unsure of how to find that magic number, contact the team at Transworld Business Advisors (Houston). Our business advisors have years of experience helping business owners prepare for a sale.
