Determing the Most Probable Selling Price (MPSP) for a business is the cornerstone in the process of preparing for and bringing it to market. A company’s value is determined by a combination of many factors such as the company’s revenue and earnings performance, industry outlook, personnel and the value of its tangible assets. Other considerations are the intangible assets such as the company’s reputation and goodwill.
There are several approaches to valuing your business. What follows is a simplification of what is often a 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. The total values are 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 often much lower since it doesn’t consider a company’s intrinsic value.
Income Approach
The income approach takes into consideration the company’s earnings using a capitalization rate, discount rate or multiplier. Several income approach methods are frequently used. Each method requires 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. Estimating 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. After Recasting the financials we 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.
Though our estimates of value are not certified appraisals, 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 price and estimate your eventual sale price. However, as deal size increases, formal third party certified valuations are sometimes desired by sellers and often 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
