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Basic Business Evaluation Methods

There are numerous scenarios in which you will want or need to value your business. You could be interested in taking out a loan to expand, you may be going public, or you may even be selling. All of these opportunities and others require you to know what your business is worth. There is no one set way to value your business, but there are a few commonly accepted valuation methods. If you come to a point in time when you need a clear picture of your business’s worth, call a skilled West Palm Beach business transactions attorney for assistance.

Market Value

Under this approach, the value of your business relies on the real market place, what a real buyer is willing to pay, and how much you are willing to sell for. You will look to other similar businesses in your area or in economically similar areas. Similar businesses include those that offer the same product or service and are of a comparable size.

This can be a difficult method to use if you own a unique business. It can also be difficult if there is little to no market data available. You can often find market data for your industry through your relevant trade organization or brokers who specialize in your type of business. If you are attempting to price your business under the market value approach for a sale, you can expect negotiations from potential buyers.

Income-Based Value

Many people build and purchase businesses because of the future economic benefit. They are often interested in the company’s current and potential income. The income approach to business valuation looks at a business’s ability to generate the financial effect the potential buyer wants.

The discretionary or net cash flow is either capitalized or discounted to determine the value. Under the capitalization method, the company’s expected economic benefit is divided by the capitalization rate, which is the risk associated with gaining future economic benefits. For the discount method, you determine the projected income for a period of future years and then you determine the discount rate to reflect the risk of generating income during that time period. Next you find the end business value for that time period and after the discounting calculation, you are left with the current business value.

Asset-Based Value

Under the asset approach, you determine the value of your business based on the fair market value of the company’s assets, including fixed assets, equipment inventory, property improvements, and owner benefits. In essence, this looks at the cost of building the business you have or a similar company. Next you deduct the business’s liabilities from the total assets to determine the current business value.

Complications can arise during this valuation process because it can be difficult to determine which assets and liabilities are appropriate to include.

Call a Business Transactions Attorney Today

Whether you are drawing up plans for a new business or have successfully built your company, you may need help with deciding which valuation method is best and who you should use to have your business appraised. An experienced business lawyer like Larry E. Bray can advise you on the various business valuation methods and the pros and cons of each. Call the Law Offices of Larry E. Bray, P.A. today to schedule a consultation.

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