Dec 29 How To Value A Business
There are many reasons you may need to assess the value of your business. It may be done on a routine basis for internal or external purposes, or both. Internally, a business’s value may need to be periodically assessed so that other business decisions related to workforce and investment can be made with a better understanding of the overall state of the business. Externally, a business valuation may be required by a bank professional in order to approve a loan or by a tax professional as part of an audit process. After it is determined that your business requires a valuation it is a straightforward process, right? Well, that depends on if you have a predetermined method for business valuation or not. If not, you have to decide how you’re going to assess the value of your business. In a situation where an external party has called for an evaluation, this decision might be made for you—the tax or bank professional will probably value your business using a standard methodology. In other situations, such as negotiations of sale or for internal projections, how you choose to value your business might be entirely up to you and might be dependent on the circumstances. Here are a few ways business owners have chosen to determine their business’s valuation.
One obvious way to determine the value of a business is to look at the sum total value of its assets. A business’s assets are anything the business owns—things like equipment and inventory. Even customer lists and accounts receivables can be considered as assets. It is always smart to have a good understanding of the value of your business’s assets.
Revenue is another common way businesses are valued. Revenue is simply the amount of money the business has coming in per year. You might hear this referred to as a business’s “revenue stream” or the yearly sales of the business. For example, a company that sells bottled lemonade to grocery stores might fill orders for $450,000 in a given year; their sales are $450,000; their revenue stream is $450,000. When businesses are purchased using revenue as a measure of their value, they are often valued at a multiple of their revenue.
Earnings are another way of valuing a business, and profit is another way of saying earnings. A business’s profit, of course, is the amount of money it actually takes in after deducting expenses from sales. The bottled lemonade company above, for example, might have yearly expenses totaling $425,000. In such an example, their net earnings or profit would be $25,000. Looking at both the revenue and earnings is crucial for many business valuations; which number is given greater importance depends on a number of other factors like the motivations and intentions of potential buyers.
Another way to value a business is based on the value of other businesses in the same market. This method simply examines what other businesses in a certain market are selling for and values the business at a similar figure. This may be done for businesses of similar sizes within a market or may be adjusted proportionally if other businesses are larger or smaller.
Though the methods described above seem relatively straightforward, they can become infinitely more complex. There are also other ways to value businesses such as discounted cash-flow and capitalization. A Clinton NJ business valuation expert would be able to provide direction whether you are in the business valuation process already or have yet to determine the right approach to business valuation.