A Business Valuation is an appraisal or determination of value of the business or property based on current and historical data establishing “Fair Market Value
A competent valuation fulfills two requirements. First, it reaches an accurate value conclusion. Second, the valuation clearly and convincingly establishes the criteria, methodology, reasoning and comparative data used to reach the conclusion. A properly prepared business valuation will significantly increase your negotiating position because it establishes a benchmark for a realistic price the seller can expect to receive and the buyer should expect to pay for the business. Furthermore, a business valuation prepared by a third party indicates to the buyer that the seller is serious.
It has been stated that a business is worth a buyer is willing to pay and a seller is willing to take. That is why the profession of valuing businesses is a mix of art and science. However, there are methodologies, algorithms and market studies that allow a certified valuator to apply a “fair market value” on a business entity. There are variations of methods used and weighted averages depending on specific industries. Business Valuators typically use three primary methods to value a business.
Market Approach – Comparing the entity being valued to counterparts engaged in the same or similar industry with the same or near volume of business.Market Approach is much like a real estate comparable method. Like businesses in size and industry sell for similar valuations. Comparable publicly traded company analysis method or the merger and acquired analysis method. There are private databases we research to find multiples of gross sales and earnings to compare to your business. This method can be very reliable in most cases and is a strong indicator of value.
Income Approach – Company’s value is based on its ability to generate income. Income Approach- Your business is worth the present value of the income it will bring to an investor. There are several complicated methods including the discounted cash flow of future earnings method as well as several capitalization methods. This approach is also a strong indicator of what a business with positive income is worth.
Asset Approach – Sometimes referred to as Replacement Coast Approach. This approach considers the fixed and current assets of the business such as equipment, furniture and fixtures.Asset Approach – values the assets of a business minus the liabilities. Some of the methods in this approach are book value, excess earnings method, asset accumulation method to name a few. However these values usually mean very little to the market value of most operating businesses. For the most part the asset approach does not properly represent the value of an ongoing business that has positive earnings.
Before Selling Your Business You Should know What Your Business is Worth.
Business valuation is an art not a science. The value driver of a business is the ability of the entity to generate future cash flow or earnings..
To determine the fair market value of your business, Hire a Business Broker… It is a must! He or she is the key player on your selling team.
Fair Market Value
Fair Market Value is of the most interest to business owners. The more knowledge business owners and prospective buyers have about the valuation process, the more likely they will come to an agreement on a purchase price.
FMV is the measure of value most used by business appraisers, as well as the Internal Revenue Service and the courts. FMV is essentially defined as “the value for which a business would sell assuming the buyer is under no compulsion to buy and the seller is under no compulsion to sell, and both parties are aware of all of the relevant facts of the transaction.” IRS Revenue Rule 59-60 lists the following factors to consider in establishing estimates of FMV:
1. The nature and history of the business.
2. The general economic outlook and its relation to the specific industry of the business.
3. The earnings capacity of the business.
4. The financial condition of the business and the book value of the ownership interest.
5. The ability of the business to distribute earnings to owners.
6. Whether or not the business has goodwill and other intangible assets.
7. Previous sales of ownership interests in the business and the size of ownership interests to be valued.
8. The market price of ownership interests in similar businesses that are actively traded in a free and open market, either on an exchange or over-the-counter.
The valuation of your business and the marketing package used to present it will be crucial to the success of the sale. As a transaction broker, we’ll help you identify the price range and optimal terms for the sale. An accurate valuation will take into account several factors, including tax returns and financial statements:
• The total value of furniture, fixtures and equipment at their current value
• All of the company’s licensed vehicles at their current value
• Average inventory value at cost
• The compensation packages of corporate officers
These methods rely on future projections and growth rates to decide what the business may be worth. Your business is worth a multiple of your past earnings if a buyer can project those earnings will be maintained after the purchase.