What is my business worth?
Most small business owners today have a general sense of what their business is worth. Determining the value of a business is usually a prelude to a major change. Maybe you are selling your business, merging with another company, seeking bank financing, or preparing to pass the business onto your heirs. The first, and most important step is to determine what it is worth.
Determining Value
There are several methods used to determine the value of your business. Each method offers a different perspective but together they will lead to an approximation of true market worth. The most popular valuation methods are:
Asset Valuation
This method is most often used in asset-heavy industries such as retail and manufacturing.
Market Valuation
This method uses industry-average sales figures as a multiplier.
Capitalization of Income
This method focuses exclusively on cash flow and return on investment (ROI), the end result is a multiple of earnings, based upon the buyer’s desired rate of return.
Owner benefit valuation
This method is most often used for businesses whose primary value comes from their ability to generate cash flow.
Business valuation is commonly used in:
- The purchase or sale of a business
- Divorce proceedings
- Estate planning
- Gifting
- Funding family limited partnerships
- Litigation