How to Effectively Value Your Business

by Kathryn Hettlinger Business Broker

Understanding how to value a business is essential whether you are planning to buy or sell a business. While there may be many variables to consider, the process needn't be overly complicated once you understand how to assess any type of business from a valuation perspective. If you are trying to place a value on your own business in order to safeguard your investment, the subsequent text can help you reconcile costs and determine an appropriate value for your company or business before you list it for sale.

All That Hard Work and Sweat

It's inevitable that a business owner will look back on all the toil it required to launch and operate their business. It's important to realize, however, that a buyer isn't interested in purchasing that past effort; they will look at the business as it is and, possibly, for its future potential as a sound investment and viable endeavor. As with nearly any deal, there is typically bound to be variation between the seller's valuation and the buyers. While the seller is hoping to recoup some of the time and added expense put into the business, the seller is likely considering the added expense that will need to go into the operation when placed under different management.

Obtain a Professional Business Valuation

Although you can calculate value on your own, it makes sense to obtain a professional business valuation from a party unconnected with the business unlike the seller or potential buyers. These valuations can even be obtained for free when you list your business for sale with the valuation service. You'll find that these professionals have experience valuing multi-type businesses across a wide spectrum of industries. Their calculations will likely address a discretionary earnings method as well as an excess earnings method. Both these assessments figure in salaries, benefits, profits, and both tangible and intangible assets to produce a value. The type of free valuation associated with the listing of a business can run anywhere from $1,000 or more. Yet if you want a sound assessment of your business's value, it's an expense that can greatly impact the outcome of your sale.

Complex Business Valuations

For more complex businesses, a fee-based valuation may be needed to determine the value of the business. Privately owned companies and small businesses depend up accurate assessments before listing their business for sale. A formal valuation, value analysis, and possibly even a merger / acquisition report may be needed to achieve a final value for the sale listing. In such cases, professional valuation is required. The consultants can provide the seller with the ins and outs of their operation and help them understand how the figures and assets add up to a final determination.

When you're considering selling your business, it can enhance your sale to have a third-party valuation. Potential buyers will appreciate the objective information, which could certainly impact their decision to make a purchase. Moreover, if you perform your own valuation, you can discuss the differences between your determination and the consultant's valuation, which can be very helpful as you arrive at a listing price.

Kathryn Hettlinger is a certified business broker in California. She has helped dozens of people buy a business with Sunbelt Bay Area. To learn more about Kathryn, connect with her on Google+.