How to Value a Business
Whenever you are buying or selling a business you will want to know what the business is worth. As a buyer, you want to be sure the business supports the purchase price and will be a good investment. If you are a seller, you want to be sure you can attract buyers, while not leaving money on the table. Determining the value of a business and negotiating a fair purchase price can be difficult.
How does a valuation expert value a business?
Peak Business Valuation, business appraiser Utah, works with both buyers and sellers to help them feel more confident in the business transaction. Through a business valuation, you can gain a better understanding of what the fair market value of a business is. A business valuation identifies key value drivers, the strengths, weaknesses, and risks of the business. Most importantly it determines a range of value for the business. Understanding this range can help you successfully negotiate a good deal for both parties.
There are several ways a valuation expert determines the value of a business. Below we briefly discuss each of these ways. For a more in-depth explanation see Common Business Valuation Approaches.
The first way to determine the value of a business is by determining the value of the assets that come with the business. Assets may include supplies, equipment, products, etc. Add up the value of each of the assets and then subtract the current value. In other words, determine the fair market value of the assets less liabilities. This approach is especially useful for businesses that may not be making a profit. It is also applicable for asset-heavy companies such as manufacturing companies and real estate firms.
The income approach is the next method a valuation expert uses to determine the value of a business. Essentially the analyst will calculate the profits and losses from the past and current financials. They will use these numbers to project the profits and losses for the business 3-5 years in the future. These numbers give an idea of what the future profits and losses of the business will be. This method can be valuable for a buyer in analyzing if the business will be a good investment. In essence, the income approach values a business based on the earnings it produces. For more information, see The Income Approach Made Simple.
The next most common approach to value a business is the market approach. This approach compares the business to other like businesses that have sold. When using the market approach, the valuation expert uses valuation multiples to compare companies. This gives the valuation expert a good idea of what the market is willing to pay for the business. Many sellers choose to list their business for a high asking price This often results in a business taking a long time to sell or not selling at all. Understanding what a potential buyer is looking for and what they are willing to pay will help you determine an appropriate listing price. For more information see The Market Approach Made Simple.
Using the above methods or a combination of methods a business valuation expert determines the value of a business. A business valuation helps the seller understand the value of their business. And for a buyer, a business valuation can help understand whether the business supports the price and will be a good investment.
Keep in mind there are many variables that impact the value of the business. Each situation is unique. It is recommended to seek the advice of a business valuation expert whether you are looking to buy or sell a business. Doing so can help you feel more confident in the business transaction.
Peak Business Valuation, business appraiser Utah, works will buyers and sellers of businesses daily. We have extensive experience working in a variety of industries. We are always happy to answer any questions you may have about buying or selling a business. You can reach out via email or by scheduling your free consultation below!
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