How to Value Your Business for Sale

There are several reasons business owners may need to sell. Some examples include health concerns, retirement, relocating to a new area, or changing careers. Whatever the reason, it is important to plan the sale early and take steps to maximize the value of your company. Business Valuation

When it comes to placing a value on your business, there are typically three common approaches you can take; asset-based, income-based, or market-based. Here is an overview of each:

Asset-Based Method: The asset value of a business is simply the sum total of all assets minus liabilities. This is the most straightforward calculation, because all that is necessary is to add up all the real estate, vehicles, machinery, equipment, furniture and other property of value. There are some assets that are hard to put a value on, however. For example, if you own an accounting firm, your client list could be considered an “asset”, but it is not an asset you could necessarily sell separately.

While it is relatively easy to arrive at a value based on assets, it is often not the most useful method of calculation. The asset-based approach works well for asset-centered businesses such as commercial real estate. But for most others, it is not good to use as the sole indicator of the value of an entity.

Income-Based Method: Valuing a business based on income involves using all available data to determine the current net income of the business and its projected future income. For most potential buyers, projected net income is the most important indicator. In a business such as a CPA firm, the aforementioned client list would be critical in performing this calculation. A reasonable income valuation would take into account past income, current client/customer data, current trends (e.g., is income trending upward or downward), market saturation, and other important factors.

Market-Based Method: This approach involves looking at a list of “comparable” businesses in your area and what they are selling for, much like you would value a piece of real estate. The challenge with this method is that even in well-established industries, businesses are unique and have distinguishable traits that tend to separate them from comparable firms within the same marketplace. While the market-based approach is a useful contributor to the valuation of a business, it is typically not the only valuation method that is used.

A Combined Approach: In the increasingly complex business marketplace, the preferred approach among most business intermediaries is to use a combination of the three common valuation methods. For example, depending on the industry, a fair valuation might split 100% worth of “weight” into 45% income, 35% market and 20% asset. To learn the appropriate valuation method for your business, it is best to speak with a business broker that has particular knowledge of your industry. This will help ensure your firm is valued properly for a successful sale.

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