Do you own a business in Serra Mesa and plan on selling it soon? The first thing you must do is bring in a business broker 92123 trusts to perform a business valuation. The purpose of a business valuation is first to help you know the fair market value of your business and second to show you how you can make your business better. There are many business valuation methods that are used. In this post, we will be looking at the four main methods.
Asset-Based Business Valuation Method
The asset-based business valuation method focuses on your business’ book value. The business broker 92123 trusts will consider the company’s total net asset value minus the total liabilities. While this may sound straightforward, the waters can get muddy when you start adding the value of intangible assets such as copyrights, branding, customer lists and trademarks. There are two approaches to asset-based valuation.
- Going concern
This approach is used for businesses that will continue operating and growing. After referring to the balance sheets, the negotiations will be on the assumed value of the intangible assets. The formula for going concern business valuation is:
Total Tangible Assets + Total Intangible Assets – Total Liabilities = Value
- Liquidation
This is the second approach in an asset-based business valuation. Liquidation is used for businesses that are closing and liquidating their assets. In this case, the liquidation value will be below the fair market value. The formula for liquidation business valuation is:
Total Tangible Assets – Total Liabilities = Book Value
Earnings-Based Business Valuation Method
With this method, your business is valued based on its ability to be profitable in future. The valuation method is ideal for stable, profitable businesses. Two key approaches are used.
- Capitalization of earnings
This approach assumes the calculations for a single time period will continue and calculate future profitability based on cash flow, expected value and annual ROI. The formula for this is:
Net Present Value / Capitalization Rate = Business Value
- Multiple of Earnings
This method values a business by its future profitability. The formula, however, calculates the worth of the business by assigning a multiplier to the current revenue. The multiplier varies depending on the current market trends, economic climate and specific industry. The formula is:
EBITDA x Appropriate Industry Multiple = Business Value
Income-Based Business Valuation Methods
This method is also referred to as the Discounted Cash Flow (DCF) method. The method requires careful calculation thus the reason you should involve an experienced business broker in San Diego. The method is ideal for companies that have a large potential for growth. The value is based on the projected cash flow of a business. The value is partially discounted to account for risk. The formula is:
Cash Flow Forecast – Discount for Risk of Future Losses = Present Value
Market-Based Business Valuation Methods
This method determines the value of your business by comparing it to other similar companies that were sold recently. Sufficient market data is needed here. The two approaches used here are:
- Sales-based: (Revenue x Sales Multiple = Business Value)
- Profit-based: (Profits x Profit Multiple = Business Value)
A business valuation should always be left to the experts. So-Cal Business Brokers has the experience and expertise you need for an accurate business valuation.