How do you know what your business is worth? The reality is‚ just like anything else‚ your business is worth what someone else is willing to pay for it. Although that is a pretty simple concept to comprehend‚ when it comes down to getting a hard number‚ the process is not that simple. There are many different “formulas” people in the industry use and no one valuation process is right or wrong. Unfortunately‚ there is no “black and white” answer. In order to get a true valuation‚ you will likely need the help of a business broker‚ investment banker or accountant who specialize in business valuations. If you are at the stage where you are unsure whether or not you want to sell your business and want to get a ballpark figure‚ the below valuations methods are commonly used but may not be completely accurate. It is suggested that you try all three valuation methods and see what numbers result from each and establish a range of what your purchase price should be. At that point‚ you can compare it to the analysis of your business broker‚ investment banker or accountant and go from there.
(i) Asset Valuation Method. This method is useful for companies that normally have large quantities of equipment and/or inventory and the value of the business is largely based upon the equipment used or inventory held for sale. When using the asset valuation method‚ the fair market value of the assets are totaled and any liabilities of the business are subtracted‚ giving you the total value. Determining the fair market value of the fixed assets is not always easy and you may need an appraiser to come in and determine the values. This method assumes that the value of the business is the same as if you were required to sell all of your business assets at auction. Although not a part of the true Asset Valuation Method‚ because there is at least some intangible value within your business that should be included‚ you should adjust this asset figure accordingly to add the “extra” intangible value your business has.
(ii) Earnings Multiple Method. This method is typically used by larger companies but can be used by smaller organizations and may be the most accurate. Simply put‚ you take the existing earnings before interest and taxes (EBIT) and multiply that figure by a “multiplier”. If you cannot determine what your earnings before interest and taxes are‚ you can work with your accountant to figure it out. Once you get your EBIT‚ you will have to use a “multiplier” to figure out the value of your business. The “multiplier” that you use will vary depending on your business and other factors. See What Multiplier Should I Use When Valuing My Business?
(iii) Comparable Sales Method. This method considers other recent sales of businesses in your geographic location. For many businesses‚ this valuation method is not possible as there may not be too many similar businesses to compare to. For other business types‚ you can get a ballpark figure of what your business would sell for by seeing what other businesses like yours sold for. You can review certain websites to see business listings but you may want to contact a business broker or investment banker to see what other businesses actually sold for.
If you are looking for more information on the business valuation process‚ how your can increase the value of your business and other related information about selling your business‚ you can request a complimentary copy of ENDWISE: the guide to selling your business with peace of mind by clicking on the icon below.