The most common time to know the value of your business is when businesses are sold and ownership changes hands. As an owner, you might be retiring from business due to failing health, divorce or other family changes and you want to know the value of your business to get a fair price. Another motive might be that you have to raise debt or equity financing to meet sudden cash flow requirements or expansion. In this case, potential investors will first want to verify the worth of your business. You might also want to take partners on board or add shareholders in which case the value of a share needs to be accurately determined.
Regardless of the company valuation methods calculation that you may choose, the true value of your business depends on a number of extraneous factors that may not be connected directly with your business. These range from the current state of the economy to the value of other businesses of similar ones operating in your area. For example business valuation in the San Francisco area for your industry will be largely determined by the selling price of previous sales of similar type of business in the area.
One of the crucial things that should be kept in mind is that you should not value your own business but instead hire a professional firm to do it for you. The reason for this is that it will not be possible for you to objectively put a value on your own business. You will not have the necessary expertise or distance to step back and get an unbiased view. Hence, it is advisable to get the valuation done by an expert Certified Valuation Analyst (CVA) or the equivalent in your location.
We use a variety of business valuation methods to assess the value of your business.
- Asset Based Method – Basically, this entails totaling up all the investments in business. One is the net asset valuation method where the value of net balance sheet value of liabilities is subtracted from the net value of assets. The second is the liquidation asset based method that estimates the net cash that would remain if all assets were sold and liabilities were deducted from the proceeds. This approach is suitable for a corporation valuation where all assets are held in the name of a company but not for sole proprietorship concerns where separating assets held in owner’s name for personal or business use may be more difficult.
- Earning value or Income method – Here, we estimate future cash flow levels of the company based on past earnings, taking into account unusual revenue and expenses and then multiply the normal cash flow estimates by a capitalization factor. Somewhat similar is the discounted future earnings method where the trend of future expected earnings is divided by the capitalization factor.
- Market value method – This is done by comparing the value of your business in terms of size, scale and facets like turnover, revenue and balance sheet parameters with other similar businesses recently sold in your location. Here too, determing the price of a sole proprietorship concern is difficult as public information is not easily available for prior sales. We have access to various databases which can make this job easier.
Bob Bates is a senior business appraiser in Exit Strategies Group’s San Jose California office. For further information on this topic or if you are looking for a business valuation in California, contact Bob at firstname.lastname@example.org or 408-769-4404.