How to Value a Business
When you get ready to buy or sell a business, the value of the business becomes an important factor. The value can be based on a variety of factors, which include how long the business has been in operation, the number of employees, the facilities, supplies, inventory and the condition of the business.
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Instructions
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Use the Asset Based Approach. It's better to value a business on its earnings; however, sometimes the earnings won't support the greater value of your tangible assets. In this approach, you find the value for your business by calculating the cost to replace the tangible assets of your business. When possible, use the replacement cost for tangible assets in the same or similar condition to your tangible assets. Otherwise, use the cost to buy new replacements.
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Try the Market Approach. Look at businesses similar to yours that are currently for sale or that have recently been sold. The closer the business is to the specifics of your business, the more accurately you can value your business. You can calculate ratios derived from the earnings, sales and assets of another business and apply those ratios to your sales, earnings and assets. Calculating the ratio is more important when you have different specifications from current business on the market.
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Calculate the value using the Income Approach. There are five ways you can arrive at this value. The Multiple of Discretionary Earnings Method uses the average of past performance to show what the probable discretionary earnings are likely to be in the near future. The reported pretax earnings, owner's salary, interest expense, depreciations and any personal expenses run through the business make up the discretionary earnings.
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Pick a multiplier from 0 to 3. Most small businesses use a multiplier in the range from 1.5 to 2.5. Multiply the discretionary earnings from Step 3 by the multiplier to get the value. The resulting value should be enough to include the tangible assets, furniture, fixtures, equipment and inventory.
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Add net liquid assets to the value. Net liquid assets include things like cash in accounts, current accounts receivable and personal property bought through the business like a car. Many owners take the net liquid assets with them upon the sale of the business and won't need to include these in the value.
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Hire a professional business appraiser. Determining the value of your business can be a complicated process. You don't want to value it too high and have buyers avoid you for being overpriced. You also don't want to undervalue the business and loose profit from your years of making the business profitable. You can find a local appraiser by selecting the link, "Find an Appraisal Expert" at the website for the American Society of Appraisers.
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