How to Value a Business if you are looking to Buy or Sell

Nov 2, 2020Business, Business Valuation

Company value is a question on many business owners’ minds. Whether you are considering selling a business or purchasing one, it is crucial to know what your company may be worth. Negotiating price is usually one of the main hurdles in a business purchase. In this article, we will dive into the many factors that contribute to the overall value of a business.

Determine Reasons for a Valuation

When buying or selling a business, it is important to establish a fair transaction price. A valuation will provide an objective indication of the company’s value. Conducting a business valuation will help establish a price or price range. A valuation will also assist in the proper purchase price allocation to be used in filing your income taxes and financial statement reporting.

Take Stock of your Assets

Once you have decided to sell or buy a business, there is a large amount of data and information that will need to be gathered for the business valuation expert. Start collecting and make a list of your business assets and liabilities:

  • Five years of financial statements
  • Five years of tax returns
  • Corporate records
  • Other financials reports
  • Selective due diligence reports

You can use this information to create an overview of your business value for buyers. This is an excellent time to seek the counsel of a professional who can provide insight into your business’s assets from a more objective perspective.

Apply Appropriate Valuation Method

Business valuation experts typically use three approaches to value a business.  

  1. Asset (cost)
  2. Market
  3. Income     

The nature of the business and the valuation circumstance will generally determine which method is appropriate for a particular valuation. 

The asset, or cost, approach determines the business value based on the total of the fair market value of its adjusted net assets. This approach will generally produce a “floor” value for which to compare the other methods to.

The market approach values the business based on comparable companies in either the public or private markets.

The income approach bases the value on future economic benefits, generally cash flow, into a present value. There are two general methods in this approach:

  • Capitalized Returns works under the premise that past economic returns will be an indicator of future value.
  • Discounted Cash Flows will take a financial projection, including a terminal value, and discount that back to a present value.

Whether you are valuing your business to prepare for a sale, having an accurate number in hand can only be positive. You can use this knowledge about your assets and earnings to make decisive improvements or necessary changes.

Smith Schafer can provide support, including valuation services, developing negotiations, developing financing strategies, and managing due diligence.

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