Retirement and Transition Plans

Calculating the worth of your business

A professional business valuation may help you maximize your selling price.

Published: June 10, 2019

Knowing the value of a business can help guide a successful strategy for selling it. The answers to these common questions may help your business valuation.

Q: I know my business better than anyone else. Can I calculate its value myself?

A: You’ve invested enormous amounts of time and resources into your business. That devotion has driven your success, but also can make it difficult for you to be objective about the value your company.

A certified appraiser can provide an independent assessment of how much your business is worth. Appraisers charge a fixed rate and will work with you to determine which valuation methods are appropriate for your business. Ask for references, and check for certifications from organizations such as the American Society of Appraisers.

Q: My business has primarily physical assets, such as real estate and inventory. What’s the best way to set its value?

A: The asset approach to valuation may be a good fit in this scenario. This method sets the worth of the company equal to the value of its tangible assets minus its liabilities. The asset approach tends to set a relatively conservative value since it doesn’t quantify your intangible assets, such as your intellectual property or what your employees contribute.

Q: The assets of my business are mostly intangible. What valuation methods are appropriate?

A: You’re more likely to look at the market and income approaches to business valuation. The market approach sets a business’s value using publicly available data, such as the price-to-earnings multiple for public companies in your industry. Your appraiser also may review sales transactions of similar businesses. This approach works well if your business can reasonably be compared to others that are publicly traded or have been recently sold.

The income approach sets a business’s value using expected net cash flow, or gross cash flow minus expenses. This valuation method can be used for any business, and may help prospective buyers determine their return on investment.

Q: Can I use more than one method to value my business?

A: Most appraisers will use a combination of methods to set the worth of your business. Ask your appraiser to walk you through the process to ensure you understand how the valuation was calculated and that you’re comfortable with the result.

No matter what type of business you own, there’s a way to show prospective buyers its potential worth. Taking the time to set an appropriate valuation will help you get the most out of the sales process.

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