Finding the Worth of Your Business
There are many reasons why a business owner may need to know its net worth. The owner may want to sell the business, buy out a partner, require to borrow from lenders for business expansion, offer shares to employees or other investors, or simply for planning for taxes or, valuing it for an estate.
Several methods can be used for such valuation and must take into account the company’s characteristics, profitability, future business prospects, and asset mix among others. Every method may give you a different value, and it is the highest of these that can reflect its fair market value.
The simplest method is that in which the value of all the assets is calculated and the liabilities that the business has is deducted from this. This does not reflect the true value if your business is a profitable one and one that seems to have good long-term prospects. This method is useful for businesses whose asset-based value is more than in operations. This is quite common in real estate and can also be used where the business does not generate sufficient returns and is moving towards liquidation.
Another method that is based on earnings is one for a business that generates reasonable returns that are greater than that of the assets that it has. The value is determined by reviewing past results, forecasted earnings, and cash flows. Approaches may differ and depend on the stability of earnings in future years.
The market method has the widest acceptance in the world of business. For this, you need to look at companies that have been sold and are similar to the one being evaluated, in size, revenue, and other characteristics. Here you may need to calculate sellers’ discretionary earnings (SDE). Here, the net profit is taken into account and the owner’s salary and other expenses are added back to the net profit. A business broker can find for you the market multiple that is prevailing in the industry that a business is in. This multiple is used with the SDE to arrive at the fair business value of a business. This method can also be used if a business owner has a valuation in mind that the business needs to be sold at. That figure can be divided by multiple to arrive at the required SDE figure. The business has then to be increased to arrive at this figure.
Valuations remain just a guide and can help in negotiating a sale or deciding on future operations and strategies for running the business. Other factors come into play when you are selling and can influence the final figure that a buyer may offer for a business that is up for sale. This can be the strategic interest of the buyer and how the business will fit into its plans, the eagerness of the seller to reach a deal, and available financing. If you want to build your credit we recommend that you purchase Personal Tradelines. Companies that are a good fit for the buyer’s business can often fetch a premium.