How to Value Your Business

calculating business valueSituation:

Most business owners will want to someday pass their business on to their families or sell it outright. But how do you value a business? What is the actual worth of all of the blood, sweat, and tears you have put into your business over the years? According to the SBA only 10% of business owners are actually able to sell their businesses. Of that number, only 10% actually sell their business outright. Most will finance the sale of the business only to have to come back in two years to salvage what is left of the business they had built. And if the business has been run on a cash basis with few receipts for the amount of funds generated by the business then any valuation will be almost worthless. There are three main methods for figuring out what your business is worth. 

Analysis:

1. Asset Approach – determines a business value by adding up the sum of its many parts. This is usually the most predictable of the three methods and gives a sale price based on assets and current accounts receivable.

2. Income Approach – determines value by calculating the net present value of the benefit stream generated by a business. This is usually more technical in discounting future cash flows and applying multipliers to EBIDA [Earnings Before Interest, Depreciation, and Amortization]

3. Market Approach – determine value by comparing the soon-to-be-for-sale business to others in the same industry, of the same size, and within the same area.

Solution:

It is impossible for the business owner to come up with a value without factoring in some emotional value into their approach. It is usually recommended that you hire a business broker or appraiser so that you can come to a fair valuation, especially if you are looking to place your business into your estate or try and secure some type of partnership or key person insurance. According to industry experts there’s a lot more ‘art’ involved in a small business sale than fact. Do your best to have an outside and objective expert as a vital part of any type of sale valuation. It will be money well spent.

If you are trying to determine the value of your business, don’t go at it alone. ASBC has experience in helping businesses calculate their value and we can help you with the process. 

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