3 Business Valuation Methods Used by Business Brokers

business broker Orange CountyA business broker Orange County will give you many reasons why you need to have an up-to-date business valuation. Most people only consider the valuation when getting ready to sell their business. This is, however, not the only time you need to think of a valuation. A business valuation can be useful when you need equity financing for expansions or when you want to add new shareholders. Regardless of the reason why you need a valuation, it is always a good idea to understand the method used by both business brokers and business appraisers. Here are the three main approaches.

Asset-based approach
With this approach, focus is on all the investments that a business has. This can be done on a going concern or simply on liquation basis. With the going concern asset based approach, the business brokers Orange County list all the business’ net balance sheet value of the assets and then subtracts the liabilities. With the liquidation approach, the valuation expert will determine the net cash that would have been received if all the business assets were sold and all the liabilities paid.

Asset based approach is more difficult when it comes to sole proprietorships. With corporations, all the assets are owned by the company and would be included in the sale of the company. With the sole proprietorship, the assets exist in the same name as the business owner. Separating the two can be hard.

Earning value approach
This approach is based on the business’ ability to acquire wealth in the near future. The valuator will determine the expected level of the business’ cash flow using records of past earnings. The earnings are normalized for the usual revenue expenses then multiplied by the capitalization factor. Capitalization factor is the reflection of the rate of return that a reasonable purchaser can expect on their investment. It is also the measure of risk that is expected if the earnings are not achieved.

Again, the valuation of sole proprietorships using past earnings can be hard. This is because the customer loyalt is tied to the identity of the business owner. When using this approach to value a sole proprietorship, the business broker Orange County or the valuator has to account for the percentage of business that might be lost under change of business ownership.

Market value approach
With this approach, the goal is to establish the value of the business by comparing it to other similar businesses that were sold recently. This method will only work if there are enough numbers of similar businesses to compare. Assigning the value of a sole proprietorship using this method is still difficult.

A good business valuation expert will combine two or all of the three approaches to get you the most accurate valuation report. Business brokers Orange County always include the market value approach. This is because they are constantly involved in the sale of businesses.

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