As a business owner considers placing his or her company on the market, ascertaining the proper value for the company is critical. A company’s value is determined by a compilation of factors such as the company’s sales, earnings performance, market outlook, personnel, net book value and fair market replacement value of equivalent operating assets. But it can also be influenced by intangible assets like the company’s image, reputation and goodwill.
There are several approaches to valuing your business. Please remember, what follows is a simplification of what is often a very complicated process, but hopefully the following summary will be helpful.
Balance Sheet Value
There are several balance sheet valuation methods, including adjusted book value, book value and liquidation value. The adjusted book value is determined by revising the asset’s book value to reflect the cost it would take to replace the assets in their current condition. This method requires the total values to be offset against the sum of the liabilities.
The book value considers the figures from the company’s financial records, as depreciated at the time of the sale. The book value can pose some difficulties for sellers, particularly if the seller has depreciated the assets aggressively to gain prior tax advantages.
The liquidation value is the amount that could be realized if all assets – equipment, furnishings and inventory – were sold separately. This value is typically much lower since it doesn’t consider a company’s intrinsic value.
Income Approach
The income approach takes into consideration the company’s level of earnings using a capitalization rate, discount rate or multiplier. Several income approach methods are frequently used. Each method requires a level of earnings and a conversion factor to translate the earnings into a company value. Selecting the proper level of earnings – aftertax, pretax, discretionary or cash flow – and matching it with the proper conversion factor – discount rate, cap rate or a multiplier – is critical to calculating a reasonable value.
Market Approach
The market approach sets a value based on the values of other businesses that have been sold. Setting the market value involves researching the sale prices for similar businesses in a geographic area. In some cases, however, finding a company that is similar in many ways to your company may be difficult.
We Can Help
Helping a business owner determine an appropriate offering price is a critical function of the business intermediary. By carefully Recasting the financials we can analyze your business to determine how the market place will receive your company, our opinion of what price range can be expected and what buyer type would likely see the highest value in the opportunity presented. This process provides you, the business owner, with information to help decide if this is the right time to sell, and at what price and terms. Armed with this knowledge you can then move forward confidently with the decision to sell, wait, or make improvements to increase the company's value and marketability for sale at a later date. Our informal Brokers Opinion of Value is offered free of charge if you are a selling client and is available at an affordable cost if you are not.
Though our estimates of value are not certified business valuations, our experience, utilization of industry tools and resources along with comparable business data allow us to give the small business owner a very good estimate of value.
For small business sales, a report based, certified business valuation is usually not needed, and our more basic valuation methods are sufficient to determine your listing and estimate your eventual sale price. However, as deal size increases, formal third party certified valuations are sometimes desired by sellers and required by lenders and buyers. VMW Business Brokers may provide this service through an outside professional firm specializing in this type of valuation work.
For more information regarding valuing your business, call or email today.
Valuing a Business
