3 Ways to Calculate the Worth of Your Business

May 13, 2016Business, Business Valuation

Are you a business owner? Do you know what your business is worth? Understanding your business’ worth allows you to make informed decisions at all times. Guessing the value of your business or its assets may result in either an unrealistically high price and turn away potential buyers or an unnecessarily low price and hinder you from realizing the business’ true value.

 
HERE ARE THREE WAYS TO CALCULATE THE VALUE OF YOUR BUSINESS:

  1. Asset-based approach. The asset-based approach focuses on the specific value of the assets and liabilities of your company. This method uses actual values; therefore it is the most predictable and objective of the three methods. However, it does not take into account any potential future earnings of the company. 
  2. Earnings-based approach. The earnings-based approach focuses on the anticipated revenue and expense of your company, discounted back to the date of valuation. This method is more complex than the asset-based approach because it uses projected future earnings, cash flows and an estimated discount rate. If your professional skill and knowledge are the reasons the business makes money, it could be hard to replicate the current earnings in future years when you are no longer part of the business.
  3. Market-based approach. The third approach is the market-based approach, which attempts to compare similar companies to yours to determine a value. This approach is highly subjective since it relies on market conditions and goodwill associated with customer connections and team experience.

So which method should you use? Unfortunately, the answer depends, both on the type of business you own and your reason for wanting to value it. It is important to work with a valuation professional to arrive at an accurate and objective assessment of your company’s financial worth, especially if you are looking to sell the business. Having a valuation prepared by an outside expert adds credibility to your asking price because the buyer will be able to see exactly how you arrived at your final value.
 

Our team of Certified Valuation Analysts (CVAs) is experienced in practicing all the above valuation approaches to perform credible business valuations for a wide variety of clients. If you are looking for assistance with a business valuation, then Smith Schafer & Associates wants to help. Contact the Smith Schafer Team at [email protected] for more information. We look forward to speaking with you soon.

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