How to Determine the Value of Your Business
If you are thinking of selling your business, the most important thing to do is find the right value for it. You may be more interested in getting rid of it but to sell business at a loss will definitely haunt you. On the other hand, regardless of how big the profit margin you want to make, if you overprice your business, finding a buyer will be difficult. It is this reason that makes valuing a business critical.
How much you sell business will depend on a number of factors. The main factors range from the business’ current state of the economy to your balance sheet. We shall focus mainly on the top three business valuation methods you can use to get the right value.
Just as the name implies, in this method, the value will be determined by looking at all your business assets. The business valuation expert will total up all the investments in your business. In asset-based approaches, there are two approaches that can be used:
- Going concern approach: this is an approach where all the business’ net balance sheet value is listed then the value of liabilities subtracted from the total.
- Liquidation approach: this is determined by looking at the total net cash that would be received if all the business’ assets were to be sold and the liabilities paid off.
Earning value approaches
This is another valuation method you can use if you plan to sell business. Focus is on the business’ ability to produce wealth in the future. When doing this, a business broker San Diego will mostly focus on Capitalizing Past Earning. The valuator will consider the past earnings of the business, normalize them with the usual expenses or revenue then multiply the figure with expected cash flows by the capitalization factor.
Another earning value approach used in business valuation is the discounted future earnings. To get value before you sell business, you focus on the average of the predicted future earnings. This figure is then divided by capitalization factor.
Market value approach
The third method that can be used to value a business is the market value approach. Before you sell business, you might hear the business brokers say that your business is as valuable as what the market is willing to pay. In this approach, the value of your business will be determined by looking at the value of similar businesses that were sold recently. The downside to this method is that it only works well where there are similar multiple businesses that were sold recently and at the right value.
Of the three methods, the earning value approach is the most common. However, before you sell business, avoid valuing your firm on your own. Hire the right help. You should start by finding the best business broker San Diego. He will guide you through the sale process and relieve you off most of the burden as you sell business. Another important person you should consider working with is a real estate lawyer. He will help with the legal part.