Some business owners have the mistaken impression that knowing what their company is worth is unimportant if they don’t intend to sell it anytime soon. However, it’s always a good idea to know the market value of your business. You may need it to attract investors, provide information to the Internal Revenue Service (IRS), determine the percentage of ownership for each partner, and several other reasons. We encourage you to learn as much as you can about business valuation even when you hire an outside agency to complete the process.
Understanding Business Valuation
Although three primary methods of business valuation exist, they all have the same goal of determining the current worth of your company. An evaluator considers several factors, including your company’s liquid assets, inventory, property, equipment, and anything else that would provide financial value if sold. The evaluator may also take your company’s revenue, share price, management structure, projected earnings, and related factors into account. Each type of business valuation has pros and cons to consider.
The asset-based method of determining your business worth considers the net value of all assets less all liabilities, as listed on the balance sheet. The going concern approach is ideal for companies that have no plans to liquidate anytime soon. This method of asset-based valuation considers the company’s equity when determining value, which is the difference between assets and liabilities.
The liquidation value approach operates under the premise that the owners wish to sell the business and liquidate its assets. The amount is equal to what the company might receive for its liquidated assets, an amount typically much lower than what it could get by selling the assets in another way.
This valuation method researches the selling price of other businesses that have recently sold in your area and comes up with a dollar figure accordingly. This method would be challenging to use if you operate your business under the sole proprietor structure since no public database of comparable sales would be available. This method is the broadest and most subjective of the valuation methods. You may need a second opinion if an investor doesn’t accept the value based on comparable sales.
Return on Investment (ROI)
Figuring ROI is as simple as dividing the amount you desire for selling a portion of the business by the percentage the buyer desires. For example, a buyer offering $25,000 for a 25 percent share of a business means that the business valuation is 100 percent. To get investors on board with an ROI-based valuation, you must be able to answer how long it will take them to earn a profit from their investment. Also, you must be able to explain what kind of profit they can expect from having invested.
Schedule Your Business Valuation with KGBV Advisors
If you’re planning to sell your business in the next few years or you want to attract more investors, obtaining an accurate value is an essential first step. We invite you to contact KGBV Advisors to request a consultation and learn more about the entire process.