There are many reasons to have an up-to-date business valuation. For example:
- You may need to sell the business due to whatever reasons
- You may need equity financing for expansion or due to cash flow problems. Potential financiers or investors will want to see that the business has sufficient worth.
- You may be adding shareholders
Regardless of the reason, how much your business is worth depends on many factors, from the current state of the economy through your business’s balance sheet.
Get It Done Right
Let me say up front that I do not believe that business owners should do their own business valuations. This is too much like asking a mother how talented her child is. Neither the business owner nor the mother has the necessary distance to step back and answer the question objectively.
A Business Valuator will use a variety of business valuation methods to determine a fair price for your business, such as:
- Asset-Based Approaches
Basically, these business valuation methods total up all the investments in the business.
Asset-based business valuations can be done on a going concern or on a liquidation basis.
- A going concern asset-based approach lists the business’ net BS value its assets and subtracts the value of its liabilities.
- A liquidation asset-based approach determines the net cash that would be received if all assets were sold and liabilities paid off.
Using the asset-based approach to value a sole proprietorship is more difficult. In a company, all assets are owned by the company and would normally be included in a sale of the business.
- Earning Value Approaches
These business valuation methods are predicated on the idea that a business’s true value lies in its ability to produce wealth in the future.
The most common earning value approach is Capitalizing Past Earning.
With this approach, a valuator determines an expected level of cash flow for the company using a company’s record of past earnings, normalizes them for unusual revenue or expenses, and multiplies the expected normalized cash flows by a capitalization factor. The capitalization factor is a reflection of wht rate of return a reasonable purchaser would expect on the investment, as well as a measure of the risk that the expected earnings will not be achieved.
- Market Value Approaches
Market value approaches to business valuation attempt to establish the value of your business by comparing your business to similar businesses that have recently sold.
Assigning a value to a sole proprietorship based on market value is particularly difficult. By definition, sole proprietorship are individually owned so attempting to find public information on prior sales of like businesses is not an easy task.