3 Ways of Determining a Business Value



Whether you’re thinking of selling your established business or maybe you’re looking for new investors to join you, there will come a time when you will have to determine the value of your business – in other words; you’ll need a business valuation.

Business valuation services are provided by professionals like EVCOR, who will work with you to conduct a thorough evaluation based of multiple factors – internal and external – to determine a fair economic value of your business. This being said, we believe that as a business owner, it’s important for you to understand how a business valuation works even if you decide to hire experts. In this blog, we’ll walk you through the three most common business valuation methods for small businesses.

Method 1: Market Value Based Approach

Probably the most subjective approach, the market value based approach determines the value of your business by comparing your business to other similar companies that have already been sold. Therefore, the value of your business depends on the market. This method can be challenging as obtaining the data on the sale of similar businesses can be difficult.

This approach may not be the most ideal method for potential investors, however, it is a good starting point to gain an understanding of what your business might be worth.

Method 2: Asset-Based Valuation Approach

In this method, you look at the total value of your assets and liabilities and calculate the difference to determine the value. For example, if you have $200,000 in assets and $70,000 in liabilities, then the value of your business will be $130,000 ($200,000 – $70,000 = $130,000).

Asset-based valuation approach is the value on your business on your balance sheet or better known as the book value of your business. This should be the lowest value that you should be willing to accept from a potential buyer. If the business is producing cash flow, this is unlikely to be the preferred method of valuation, however.

Method 3: Income-Based Approach

The income method is based on your day-to-day financial activity where you use your daily books to show potential buyers that your business is generating enough cash flow to make it a profitable investment.

By looking at your profit and loss statements, you can project the future profits and debts and find out the value of your business using an appropriate capitalization rate.

Source: https://www.evcor.com/blog/3-ways-of-determining-a-business-value/

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