Business brokers Los Angeles do not just help with the sale of a business. They can also help you with business valuation. The best thing is that most of these valuation services are complimentary; you don’t need to pay a dime for the service. However, before you get started, it is important that you understand the three main valuation methods that are used by appraisers and brokers alike.
Asset based approach
Just as the phrase implies, this valuation method focuses on the business’ assets. The expert totals up all the investment in the business. This strategy is used in going concern and in liquidation basis.
- Going concern: The strategy here is to make a list of the business’ net balance sheet value of its assets then subtract the value of liabilities.
- Liquidation basis. This looks at the net cash that can be received if the assets of the business were sold and all the liabilities paid off.
This valuation method is more difficult when working with a sole proprietorship. This is because the assets here exist under the name of the owner and it can be hard to separate the assets from personal use and business. More often than not, a business broker Los Angeles will use this strategy with corporations since the assets are all owned by the company and are included in the sale of the company.
Earning value approach
The valuation report here is based on the business’ ability to produce wealth in the future. The most common approach used is the Capitalizing Past Earning. With this method, the business broker LA or valuator will determine the expected level of cash flow for the company using records on past earnings. The records are normalized using the usual revenue or expenses then multiplied by the capitalization factor. The capitalization factor is the reflection of the rate of return a reasonable buyer would get on the investment and the measure of risk that can be expected to come with the earnings. The Discounted Future Earnings is yet another approach that is used with this method.
The business valuation of a sole proprietorship can be tricky when using this method. This is because customer loyalties are tied directly to the business owner. Valuation of a sole proprietorship has to account for business that may be lost after a change of ownership.
Market value approach
This is the main strategy used by business broker Los Angeles. It tries to establish the value of a company by comparing the company to similar businesses that were sold recently. This method will only work if there are similar businesses in the same region.
The three are the main methods a business broker Los Angeles or a valuator may choose to use when determining the value of your business. The expert may use one method or combine several so as to get a more accurate report.