Like beauty, value is in the eye of the beholder. An accurate valuation is crucial for determining a fair price and negotiating a deal.
An investment banker or professional appraiser can help assess a business' hard assets as well the value of its intangible factors (e.g. goodwill, intellectual property, customer base, and future profits).
Value Factors
A number of factors should be taken into account to ensure that a valuation is accurate and useful. Some of these factors include: |
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- History and nature of the business
- Maturity of the business and its industry
- General economic outlook, including industries that affect your business
- Financial condition, book value, and earning capacity of the business
- Dividend history and paying capacity of the business
- Investor risk inherent to your industry
- Value of the business in the absence of the current owner
- Stock sales
- Stock of comparable public corporations
Valuation Approaches
Some of the most common methods for assessing the value of small businesses include:
- Asset-based valuations. Assess account figures such as the book value and liquidation value of the business. This type of appraisal is frequently considered a bare minimum and is not the sole variable for an asking price.
- Earnings-based valuations. Take into account historical financial figures, including cash flows (past, present and projected), debt payments, and revenues. These are frequently combined with asset-based valuations for a more inclusive appraisal.
- Market-based valuations. Based on selling histories of similar businesses in your area and industry. This is not a comprehensive valuation tool, but it is often used by business brokers at least as benchmarks.
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