A business valuation helps business owners to understand the current market value of their businesses. So, let’s say you want to sell your business, but you don’t have any idea about the current value of the business—business valuation will assist you.
When seeking to know the value of your business, a business valuation will factor in several aspects of the business, like the current and future income of the business, as well as its assets and financial structure to determine its accurate value. Now, once you understand the accurate market value of your business, you don’t have to worry about being conned or manipulated by buyers.
Contents
Factors that determine the value of a business
The following factors play an important role when determining the worth of a business. Please note that these factors are universal, and will cut across all businesses, regardless of the industry. These factors include:
- Size of the business – generally, the bigger the business in terms of industry performance and revenue, the higher the value.
- Profits – a business that has been making profits or one that has a higher profit margin has a higher value than the businesses in the same industry with lower profit margins.
- Potential future growth – if projections show that your business is set to grow in the future, or you have plans to expand your business, products, or services, the value of the business will be higher.
- Competitive advantage – here, you have to ask a few questions like; what makes your business unique? What makes it different from other businesses in your industry? The services or products you provide should not only provide value to your clients, but they should do in a manner that sets your business apart from similar companies.
- Market traction and growth rate – these two key factors greatly determine the value of your business. The larger the market share, the higher the value of the business.
So, what’s the best way to determine the current worth of your business? Read on for more details.
Asset-based valuation
This approach focuses on the business’ assets. The price of the assets determines the value of the business. To get the worth of your business using this approach, you need to minus the total liabilities from the value of the total assets. However, you should note that there’s room for clarification for the assets and liabilities that should be used to value the business.
The asset-based valuation approach aims to define the cost needed to start another business, similar to the business you want to sell. However, this approach has one major challenge—you cannot value intangible assets. Thus, the asset-based valuation methods don’t apply to all businesses.
Income-based valuation
This approach focuses on the income of the business. To get the total income of the business, you should get the total net operating income, and divide it by the current capitalization rate. The income-based valuation approach is mostly used in the real estate industry, although it can be applied to other businesses.
And, just like the asset-based approach, the income-based valuation approach has its challenges too. The approach focuses more on the business’ cash flow, rather than the current condition or status of the business. While the income-based approach is the best way you get insights into the worth of the business, it doesn’t provide an all-encompassing picture of the value of the business.
Market-based valuation
This is the third and last method of valuing a business. The market-based valuation approach assesses previously sold businesses, which are in the same industry as the listed business. Thus, the current worth of your business will be determined by the average value of similar businesses. However, the market-based valuation approach considers other factors of the business being sold. Adjustments must be made to the value depending on the quantity, quality, and size of the business, compared to similar businesses.
Just like the other two approaches, the market-based valuation approach has its drawbacks. At times, your business might be compared to other businesses that were sold at a significantly lower price because it wasn’t properly evaluated. In addition, the market-based valuation approach applies only to some businesses.
Bottom Line
Always work with professionals when valuing your business. Besides, you should note that none of the above three methods is perfect. Valuing a business isn’t an easy task, considering that there are a lot of considerations to make. Apart from the tangible assets that you can see, businesses have intangible assets, which can significantly increase the value of the business. However, it’s hard to determine the intangible assets.
So, always get your business evaluated if you want to sell it. When you consult a professional like Orlando Business Broker during this process, you have better insights into the value of the business. Besides, since professional business brokers do this job frequently, you will get an accurate value of the business. Avoid selling your business for too little—consult a business broker and let them evaluate your business.
