How to Value a Business

When preparing to sell your business, you’ll have to value your business. Find out valuation methods here.

Methods for Valuing Your Business

When selling your business, you’ll have to put a number on it. It’s been said that a business is worth what someone will pay for it and what you would sell it for. However, this is incredibly subjective. You have put countless hours into your business, and taking yourself out of the equation to put a value on what you have built may be difficult.

While we recommend hiring an experienced business broker to do this successfully, it is certainly beneficial to know some of the common methods used to value businesses.

The Business Valuation Calculation

There are many business valuation calculators online that put factors into consideration including annual earnings, marketability, anticipated growth, but those calculators typically fail to take the local business market into account (or your industry). For example, if you are in an area where a certain industry was seen as a bigger risk, the valuation may be lower. The lower the perceived risk, the more a buyer is willing to pay.

Asset Valuations and Liquidation Value

This method of valuation takes into consideration all of the businesses inventory and assets. For this method, you would take the balance of all the assets and subtract the value of the liabilities.

A liquidation value would determine the value of the assets if it were forced to sell them quickly. This method isn’t particularly great for small businesses that may have limited assets (such as computers and office equipment) because it will value the business too low.

Earnings Value Approach

This is the most popular method of business valuation because it is considered a fair way to set a selling price. To determine your earnings value, you’ll determine the cash flow of your company, normalize them for unusual expenses or revenue, and multiply it by a capitalization factor. This factor is the reasonable rate of what a buyer would expect on the investment. As you can see, business valuation is complex.

Have an Expert Help with Your Valuation

In most cases, the best way to get a price that will actually result in your business selling is to use a professional valuation. As I mentioned previously, if you’re planning to sell your business, we highly recommend hiring a business broker. The advisors at Emerald Coast Business Brokers will work with you closely to place a value on your business and get it prepared for market. Though there are several perks to working with a broker, one big one is that they know the market in your area.

Because they are involved in countless business sales each year, they understand what buyers are looking for and what they are willing to pay.

If you’re ready to value your business, contact one of the experts on the Emerald Coast Team. Our goal is to revolutionize the business selling experience by taking the stress and confusion out—starting with the business valuation process. Fill out this form to set up a confidential consultation with one of our trusted advisors.