How To Value A Business

There are many components to business valuation.  Merely reviewing records will not give you the whole story of a business’ value.  There are a variety of factors used to determine the value of a business, and several different approaches to business valuation.

Elements of Business Valuation
The economy of the nation, region, and city or state is reviewed during a business valuation.  A painstaking evaluation is also done of the company’s financial state.  A normalization of financial statements is also conducted and may involve a comparability adjustment, a non-operating adjustment, a non-recurring adjustment, and a discretionary adjustment.  The final part of a business valuation will also take into account the size of the market, the value of the competition, and future trends related to the business.

Approaches to Business Valuation
The 3 main techniques used for business valuation are evaluating the income and fair market value of the company, reviewing the actual assets of the company, and comparing the company to similar businesses in the same market.

Business Valuation through Income Review
A discounted future or the capitalization or income are different ways of reviewing a company’s income to determine its value.  This method may be combined with the asset approach tin order to figure out a business’ excess earnings.

The Assets Approach
This approach determines the sum of the parts of the business in order to value the entire business.  The values of each part of the business are adjusted to fair market value whenever possible.  Unfortunately, this approach to business valuation only accounts for the business’ concrete assests.  This approach to business valuation is generally used during liquidation of the business.

Market Method
Based on the principle of competition, the market approach takes into account the supply and demand for the products and/or services of a business.  Supply and demand can drive the value of a business down or up.  The market method is like comparing recently sold comparable real estate when selling homes and other properties. The market approach may use the guideline public company method in which it uses information from publicly traded companies, or the guideline transaction method, (which can also be called a “direct market data method”), which uses published information about actual relevant transactions.

Banks may be able to assist individuals in the specifics of business valuation and can often answer questions.

GlobalBX.com provides a FREE business for sale exchange connecting business buyers, sellers and lenders.  Search over 32,755 businesses for sale and franchises. Sell your business for sale for free with no listing fees and zero commissions. Contact over 300 lenders directly and get financing for business and commercial real estate.