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True Worth: The 3 Approaches to Assessing the Value of a Business

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Business owners choose to sell their companies for a wealth of reasons. Retirement and a loss of passion for what they are doing are common reasons for selling.

When making the decision to sell, the owner must get a proper valuation for the company.

1. Asset-Based Valuation

An asset-based valuation is calculated according to the total value of the company’s assets. A valuation company or broker will gather details about all the assets the company owns, and they will complete an official appraisal for each asset.

They calculate the total value of these assets together to arrive at the asset-based valuation. Essentially, the process is similar to what would happen if the business owner chose to liquidate their business assets instead of selling their business.

If the business decides to sell and wants to maintain ownership of any assets, the business owner will need to first separate these assets from the business. When creating a valuation, their broker will exclude these assets.

If they want to shut down the business completely, asset-based valuation is the best choice for the business owners. Companies can get an asset-based valuation by contacting Business Valuation Companies now.

2. Earning Based Valuation

An earning-based valuation requires the company to provide the broker with all their financial records for the last three years. These valuations look at how much the company earns per quarter and annually.

The incoming cash flow is compared to the company’s current debts and tax implications for each year. The company must be successful and generate a profit if the owner wants to sell and keep the business operating.

These valuations show potential buyers the net worth of the company based on its profits and deduct all outgoing funds. The business owner must have financial records that show a history of steady profits and properly managed debts and tax payments.

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The company cannot be in the red and get a positive valuation that could appeal to a buyer. The total value of the company must show that the new owner will generate profits from current revenue streams and give the new owner more of a return on their investment.

A business that is in financial trouble will have a lower than average value.

3. Market-Based Valuation

The market-based valuation is based on the projected selling price of the existing company and its commercial property. The broker looks at similar companies within the same industry and the most recent selling price for the businesses in the same area and community.

The market value will also be based on the total assets and a  review of the financial results and true earnings for the business.

Potential buyers will not want to pay a lot more for a company in an area where similar businesses were sold at a lower price. The market analysis could help the owner decide when to sell their business and when to get started on the process.

If the market value doesn’t present a value that is acceptable for the owner, it may not be the best time to sell the company.

Conclusion

Business owners who want to get started on a business sale need to get a proper valuation for the company. What the owner intends to do when selling the company determines what type of valuation they need.

If the owner is shutting down the business, they need an asset-based valuation. If they want to sell a fully operational business, they may choose the earning-based or market valuation.

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