How Much is My Business Worth

Most business owners reach a point when they want to move on to the next phase in their lives. At that point, the question “what is my business worth?” becomes of paramount importance. Even if they are not looking to sell right away, it is good to know the value when the time comes. Business Valuation

Businesses are similar to most other assets. Simply put, they are worth what a buyer is willing to pay at a given time. The main difference is the complexity of factors that go into valuing a business verses a simpler asset such as residential real estate.

There are three general approaches to valuing a business:

Asset-Based Approach: In this approach, totaling all assets and subtracting liabilities calculate the net balance sheet of the business. This approach is suitable for businesses such as commercial real estate, where asset values are a primary factor.

Earning Value (Income-Based) Approach: This approach values the business based on the net cash flow and multiplied by a certain number of years to determine the appropriate return on investment for the buyer. In some cases, future earnings are discounted to provide a more conservative multiplier.

Market Value Approach: In this approach, the value of the business is determined by the sale of comparable businesses in the area. The market value approach is only effective in cases wherein there are a sufficient number of comparables in the current marketplace.

Most businesses are valued based on a combination of the three approaches, with a certain percentage of weight given to each approach depending on the specific circumstances. For small to medium-sized businesses in a wide range of industries, the earning value approach will carry the most weight.

Business valuation approaches provide general guidelines for finding out what your business is worth. There are also specific factors to consider that are valuable to buyers. These include:

  • Current Financial Performance: Are your earnings trending upward, downward, or are they flat?
  • Business Records: Are your records well organized, making it easy for prospects to perform their due diligence?
  • Market Conditions: How competitive is the current market? Is the business positioned to increase or decrease market share in the near future?
  • Employees/Staff: How long have the employees been with the business? Are all (or most) employees likely to stay on with a new owner?
  • Customer/Client Base: Is there a strong base of repeat customers/clients? Or is the business more dependent on acquiring new customers?
  • Technology: Is the business operating at maximum efficiency? Or are there technological upgrades required to remain competitive?
  • Service/Reputation: Does your business have a strong reputation for customer/client satisfaction?

The more positive you can answer these questions, the more attractive your business will be to prospective buyers. If these questions have helped identify some weak spots, these can be addressed as well. The best place to start is to speak with a business broker that specializes in business transactions within your industry. A business intermediary can advise you on what buyers are looking for. Even if you do not list your business for sale with a broker, their consulting services can be invaluable in positioning your business to attract optimal value.

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