You are preparing for the complex, daunting task of selling your business. Selling a business is no mean feat, and there are several intricate steps to take before the sale is complete. One of the most important steps is to get an accurate valuation of your business.
Valuing your business is not a process to be taken lightly. When you are ready to begin, you will have three methods of valuation from which to choose. Each method has its own strengths, and it will be up to you and your financial planner or attorney to determine which method is best for your company.
An asset-based valuation is based on a company’s total assets. While there are a few different types of asset-based valuation, they all follow a similar approach. The value of your company’s assets will be added up, and then the cost of its liabilities will be subtracted. The resulting figure is the value of your business. Generally, asset-based business valuations are better for corporations than sole proprietorships, as it can be difficult to separate business assets and liabilities from personal ones.
A business can also be valued based on its potential to generate wealth. This method uses a company’s earning history to predict its future earning potential. Then, the valuator uses this figure as well as an assessment of the business’s risk to estimate a purchaser’s expected rate of return. The earning-based valuation method is well-suited for businesses that are expected to grow substantially in the future or that have more investments than revenue at the time of the sale.
Market rate valuation
The third option for obtaining a business valuation is to determine a company’s market rate. This is done by comparing your business to similar businesses in your market that have recently been sold. Then, the valuator approximates the market rate of your company. The market-value approach can be a great method of valuation, but it has its limits. This method will only be accurate if there is a sufficient number of businesses in your market that are similar to yours.