How Much is my Business Worth?

Many people with businesses, especially small businesses, do not know how much their business is worth. They do not know how to get the business valued or how to value it themselves. Business values are based on inventory and liabilities. Customer lists are counted as an asset.

Significance

Should you ever decide to sell the business, you should know what it is worth. Also, in cases of divorce, and the business is or has become a marital asset, you should know the value of the business, as it will need to be equitably divided between the parties.

Function

Business worth can come in handy, even though your marriage is stable and you do not want to sell. Knowing your business's worth can also help when you apply for credit, when you need more inventory on a credit basis from individual suppliers and is also part of your portfolio. If it is a publicly traded business, you should always know what your business is worth and should follow it on at least a weekly basis, if not a daily basis.

Time Frame

The worth of your business changes over time. It can change daily, especially if it is a publicly traded business, or it can change weekly or monthly. If you have a large inventory of high dollar, slow moving items such as motor homes, the business worth may only change monthly if you do not make any sales that particular month.

Features

Business worth can be determined by many things, including assets and liabilities, stocks and bonds the business may hold, inventory or bank accounts. If the business holds stock or owns stock, the business worth will changes as the stock changes. Inventory inflow and outflow affects business worth. New liabilities or liabilities that have been recently paid off affect the business' worth. Customer lists are also worth something to a business, and customer lists change over time, changing the worth of the business.

Size

Knowing the business worth is important. Any size business can hire a business appraiser to have its business appraised. If you do not have a clue as to how much it is worth, hire an appraiser to get started, then keep on top of it yourself.

Considerations

Accounting principles to value a business include the following:
Cost principle: For assets and liabilities, companies must report on acquisition costs instead of FMV (fair market value).
Revenue principle: Companies should record when revenue is realized and earned, not when payment is received. This is also called accrual basis accounting.
Matching principle: Companies should match expenses with revenue. Expenses are counted when the work is paid for.
Disclosure principle: All amounts disclosed are based on a trade-off analysis.
Once an accountant looks at these principles as outlined in the steps above, she will write the appraisal for the business.