How to Find the Worth of Your Business
If you are planning to put up your small business for sale, there are a few things you must consider beforehand. The first question you should ask yourself before putting up a small business for sale is ‘what is my business worth?’ Once you know the answer to that question, it will be easier for you to plan which deal to accept.
What is a Business Valuation?
It is crucial to understand the concept of business valuation to determine the worth of a business. In simple terms, it is a process based on a set of standard procedures, which will answer the question, “what is the value of my business?” for you. Although it sounds like an easy task, it is anything but easy to get a reliable estimation of your business’s value.
Various Factors Determining Business Valuations
If you are wondering, ‘what is the value of my business?’ then there is no way to find a definite answer for that question. This is because business valuations are set differently according to the industry and the people you are dealing with. For example, for a business owner, having respectable business ties with the rest of the community is well worth it, while for an investor, the deciding factor will be the income history as well as future profitability of the business.
Moreover, economic conditions will also play an important role in determining the answer to ‘what is my business worth?’ One great example of this is a situation where there is a scarcity of jobs. This leads people to buying up businesses as a means of income and the competition increases the selling prices, hence increasing the valuations of a business.
If you are looking to find the answer to ‘what is the value of my business’, then also look at the circumstances in which you are going to sell it. There is going to be a difference in the market value based on whether you put up a small business for sale in a strategically planned manner or whether you decide to sell it hurriedly at an auction or to the first buyer that comes your way.
Expected Price VS the Business Value
Business value is, therefore, only an estimation of an expected price for the business. For how much it will actually sell, depends on who is in charge of answering ‘what is my business worth?’ For someone looking to buy the business for its lifestyle goals, the value will be higher than for someone buying it for an income stream at the lowest possible price.
Three Approaches for Finding your Business Valuations
Apart from the subjective factor that depends on the buyers’ motives, you can use the following three approaches to find an answer for ‘what is my business worth’.
Asset Approach
In this case, the business valuation is found out by using the liabilities and assets of a business as building blocks. This method is based on the substitution principle of economics. This principle revolves around the following question:
How much it will cost to generate a similar business with similar economic profits for the owner?
Every business, irrespective of the industry it belongs to, has some assets as well as liabilities. To find out the valuation of a business, all you have to do it determine their values and find their difference. This will give you the asset valuation of the business.
The real challenge here lies in sorting out the details such as which liabilities and assets are to be included, selecting a standard for measuring the value, and calculating the value of the assets according to these standards.
Know that balance sheets may not have some of the important assets such as the company’s special products listed in them. This is because you, as the owner, are not paying for them. However, the value for such products may be much more than what is recorded in the sheets.
This is one drawback of the asset approach.
Market Approach
This method of business evaluation will rely on signs from the market to answer ‘what is my business worth’. This approach uses an economic principle called competition. This principle is based on the following question:
What is the worth of other businesses that are like my business?
No matter which industry you are in, there are bound to be other people running similar businesses as well. As such, based on the concept that if there is a business in the market, there will be some people willing to sell it and others who will be willing to buy it from them, the market will have a range of selling price for that particular business. This applies to your own business in the same industry as well. It is called a fair market value.
A fair market value is a price that both buying and selling parties will pay while in full knowledge of the market value and relevant facts about that business.
Therefore, using the market approach is a great way to find the fair market value of your business. You should always find the market value of your business as it will help you in determining your offer price according to the “going rate.”
Income Approach
The income approach of estimating the value of a business is based on how much the business can offer in term of monetary gains. It uses the following principle of economics, called expectation:
What economic benefit will I receive for investing my money, time, and effort into the business?
Since this approach talks about the future outcome, it involves a certain degree of risk as well. The money is yet to come into the bank and you will be required to take a guess here. You will have to figure out the kind of monetary benefits the business will bring for your potential buyer.
If you are ready to put up your small business for sale, then you should use the above methods for finding out the value of your business. However, it may not be a simple task to do on your own and the best way to go about it is to use the services of a reliable broker. Kirksey Business Brokers are reliable and can take care of your business dealings in Grapevine, Mid Cities, Trophy Club, Fort Worth, and other surrounding areas.
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