How Does Business Valuation Work? Here’s What You Need to Know

How Does Business Valuation Work? Here’s What You Need to KnowThere are several methods and factors involved in determining the monetary worth of a business. Proper business valuation is important when buying or selling a business, adding shareholders, wooing investors, and applying for loans or other financing sources. Experienced business lawyers know what to look for and analyze when determining the value of a business. Understanding the various ways the valuation of a company may be determined can help you make sound decisions whether you are thinking of buying or selling a business.

Asset-Based Business Valuation

Also known as book value, asset-based business valuation totals all the investments in the company and can be determined in two ways. A going concern asset-based approach involves a review of the business’s balance sheet, lists the company’s total assets, and subtracts its total liabilities.

If you opt for a liquidation asset-based method, a value is placed on the company according to the net amount of cash that would be available if all assets were sold and all liabilities were paid. If you are selling a profitable, thriving business, you may be able to get more than book value for your company.

Market Valuation

This method determines how your business stacks up to comparable companies that have recently been sold. To a fair market value, research how much comparable businesses have sold for in the past two years and value your business at a similar amount.  Although you most likely want to price your businesses at fair market value, you can increase or decrease the cost, depending on the data that shows what buyers will pay.

Income Valuation

The income method looks at your past profits and cash flow to determine what your business is worth. Using your profit and loss statement, you can project future profits and debts. If you’re selling a small business, it is important to remember that buyers often take out a small business loan to purchase a company, so you want to demonstrate to the buyer that your business can produce enough profit to pay off the loan. Typically, the more effective your business is at paying debts, the higher its valuation will be.

How to Improve Your Small Business Valuation

Careful planning can help get your business off to a good start or improve the valuation of an established business. One key element of this is to have a business succession plan in place.

It is also vital to maintain accurate, up-to-date records, such as financial statements, profit and loss statements, and accounts payable/receivable. Having all this information organized and readily available can help buyers see the potential risks and profits buyers may face. Hiring a qualified accountant or diligently utilizing accounting software can enable you to keep track of your company’s finances.

Business valuation can be more complex when selling a sole proprietorship. While all assets in a corporation, LLC, or LLP are owned by the company and would typically be included in the sale of a business, separating business assets from personal assets in a sole proprietorship can be challenging.

Have a Professional Do Your Business Valuation

Although you can do your own business valuation, consulting an experienced professional is a must to ensure the number you put on your company is accurate. Our business lawyers in West Chester can offer valuable legal advice and help you get the most for your money whether you are buying or selling a business.