3 Ways To Determine The Value Of Your Business
Congratulations, when you started your company, it may have been a far off dream to one day be successful enough to create something of value that you can live on and allow you to sell the business. If you are ready to sell, the first step to selling is to determine the value of your business, however the process of determining the value can be rather complex. There are three primary processes that can help determine the value of your business.
Asset Based Approach
One of the most common ways to value a business is by starting with the asset-based approach. An asset-based approach is a type of business valuation that focuses on a company's net asset value which is identified by subtracting total liabilities from total assets. There is some room for interpretation in terms of deciding which of the company's assets and liabilities to include in the valuation and how to measure the worth of each. This is often considered one of the more simple ways to value a company because it assesses the value of each underlying asset and then combines all assets to determine the true company value.
This process will require the appraisal of the more significant assets, which could include heavy machinery and equipment, inventory, accounts receivables, and even real estate. Another asset that can be harder to quantify is the value of the relationships and future income streams that are attached to a growing list of clients.
2. Market Approach
The market approach can be used in some situations to come up with the value of your business. With this form of an assessment, a business appraiser or consultant will assess how much other businesses in the area have sold for in recent years. This assessment can be very helpful when there are a lot of direct competitions, such as if you are valuing a restaurant franchise that has a lot of active sales. However, if your business is unique, the approach may be a good starting place but will not get you all of the information that you need.
3. Income Approach
Finally, the income approach is a common way to value your business. This assesses your financial statements to determine your true adjusted revenue and after-tax income. It is common to apply a multiple to both of these figures to come up with the final business value. The multiple that is used is often based on multiples that were applied to the sale of companies in the same industry.
Stabilized companies with a long history of operations can be valued using historical income statements and tax returns, but it can be harder to value a company using this method if they are in the growth stage. Companies that are continuing to grow and have spent a lot on marketing and customer acquisition costs may not have a very positive bottom line. However, the potential that they provide can give a lot of optimism to someone that is looking to invest in a company. Due to this, it is also common to apply some form of multiple on reasonable projections for the company moving forward.
While these approaches can seem rather complicated, all can be achieved but you may need to use multiple different forms of analysis and business valuation assessments to come up with the fair value.
If you have any questions about determining the value of you business, please feel free to contact us.