Deciding to sell your business can be stressful in both an emotional and a practical way. Knowing what your business is worth is not as easy as it might seem. You may think that if your company is making a profit, you should be able to get a fair price. However, things are considerably more complicated in reality.
According to neumannassociates.com, there are three basic methods business brokers used to determine the value of a business.
The Earning Approach
One way to determine the value of a business is to figure out how much money it has the potential to make in the future.
Analysts determine the company’s value by looking at its past earnings. They then normalize that number by discounting any unusual earnings or expenses. They then divide income by a capitalization rate. A cap rate is the anticipated rate of return to be earned in a real estate deal. Cap rates can also be applied to business purchases by using an industry rate. For example, If a company made $2 million and the industry cap rate is 6%, the business value could be assessed by dividing 2 million by 6%.
When a company does an asset-based business valuation, they will assess the total value of all of the money that they have invested in their business. There are a couple of different ways to determine a company’s assets.
One approach is called book value. This is where a potential buyer simply uses the company’s balance sheet to determine a company’s worth. They subtract the company’s liabilities from its assets.
Another approach looks at how much a company would be worth if one were to liquidate all of the assets and pay off all of its debts.
The market value method looks primarily at other businesses of your type that have been sold recently. This form of valuation borrows again from the real estate industry. Houses are often valued on the basis of other homes around them.
It is easy to use this method to put a value on real estate property because normally, there will be many houses around each individual house. If there are a lot of businesses that are similar to yours in your area, this method might work pretty well. For example, if you own a cafe in an area with a lot of restaurants, the market value method may be a pretty good determinant of how much your business is worth. If, on the other hand, you own a novelty shop in an area with few retail shops and even fewer novelty shops, this would not be an ideal method for you.
It is a good idea to talk to a business broker about which of these three methods would be the best one to value your particular business. A business broker will understand all the steps that need to be taken for a successful sale of a business.
You have worked hard to make your business what it is today. You should wait for a great time to sell it and let a business broker handle the paperwork for you. You will see how well all that hard work can pay off.