If you’re in the business of buying and selling, you’ll need to know how to value a business correctly. There are basically two types of valuation methods: earnings and book value. Some companies also use a third type of valuation called net worth, which is simply an adjusted net worth (net worth less the liabilities of the business). This article will explain the differences between these types of valuations and why they’re used.
Option One: Earnings. Here, the seller financing is the buyer. Value the business based on what it’s actually worth to the buyer. This method is very useful for new ownership, since the new owner must invest money into the business to make it valuable to investors.
Option Two: Earnings Multiplication. Here, the seller financing is the buyer, and the value of small businesses are the multiples of potential earnings of the business over its total current value. Again, this is a good method for new ownership, since the owner must add positive numbers to the business’s current value before making any further improvements. However, a detailed valuation report that details all of the business’s assets and liabilities is required for investors.
Option Three: Book Value. This is the most widely used form of small business valuation. Here, the buyer is from the seller, and the seller s discretionary earnings (sde) is the company’s stock price. Companies value their stock by adding their net worth to their tangible assets. This process is the opposite of how to value small businesses by increasing the business’s net worth.
What should you do about these three options? They are not mutually exclusive, but they are difficult if not impossible to apply to every type of seller-financing situation. In situations where seller financing is the only means of obtaining a loan, it makes sense to consider the different types of financing available, since it could impact your decision to purchase a business. For example, business owners can obtain a low interest short-term loan from a private investor.
Investors usually have better buying power than venture capitalists, which allows them to purchase more shares or other assets than a typical entrepreneur. If an investor cannot be obtained, there are other sources of funding such as bank loans, grants, or small business loans from financial institutions.
If a business has multiple stakeholders, how to value small businesses becomes more complicated. For instance, if one of the major stakeholders has a large tax liability, the overall valuation will be much lower because of the potential tax penalty. Similarly, the profit margin of the business may be much lower if one of the key stakeholders has an extremely high rate of return.
It’s important to consider all of the relevant factors when asking business value. While tax liabilities and profitability are important considerations for any business purchase, it’s equally important to consider the long-term viability of the company in light of its key stakeholders. The most accurate valuation will take all of these into consideration and use them to determine an accurate value.
Valuing a business based on what you think the business is worth when you bought it isn’t realistic. To get the most accurate valuation, use business valuations provided by professional business valuation experts.
A good business valuation expert will provide a comprehensive outline of the business’s liabilities, assets, revenues, and other variables that may impact the value of the business over time. He will also provide information on the variations of the estimated value of the business, so you can estimate how it would change if specific factors were changed.
For example, if the estimated value of the business increases because of one specific variable but decreases because of another variable, your value will remain the same. Business valuation experts are experienced in identifying and documenting the effects of various factors that can significantly change the value of a company. They will help you evaluate the business as if it were an investment.
danstheman
Dan Lewis is a business and finance consultant who stared is career with Capital One and worked as a business and finance analyst for over 25 before leaving the corporate world to create this blog.