Business Valuation Methods
If you are planning to sell your business, the most important thing to think about is how much is the price of everything. It is essential to ask yourself about the worth of your business.
The truth is that there are no particular way to find out how much is the value of your business. Sometimes as a seller, you would want to raise the price to roof. On the other hand, the buyer wants to do the opposite.
There are ways on how to put value in certain parts of a business like fixed assets, equipment and stocks. There are also elements that can give business a value. Example of which are goodwill that includes trade and reputation of the company. It would be extremely hard to put value on these things. In some cases, the value will depend on how much keen the potential buyer is.
When it comes to computing the value of the business, there are different ways of doing so. An option is calculating how much it would cost to create a business that is similar. There several techniques on doing so. There also factors that can influence the value of your business.
- Earning multiples - This is commonly used by businesses. This is good especially if the business have financial history. The formula is the value of business divided by tax profits. It is sometimes hard to determine what ratio to use. Normally, business advisors will often suggest 5 to 10 times the annual tax profit.
- Entry cost - This is the cost of the similar business that is predicted. This would include the cost of developing marketing strategy, training staff, purchasing equipment and developing product and services
- Asset valuation - This is perfect for those companies with tangible assets like properties. This is attained by knowing the value of every asset the company owns.
- Discounted cash flow - This is calculated using cash flow over a period of time. It is hard to establish terminal value because it relies on cash flow estimates. This is good if the company has a lot of potential but few assets and little to no financial history.
- Industry valuation - In some industries, business change regularly. There are industries that follow rules of the thumb. Example of which are recruitment agency and accounting firms. When you calculate the value of your business by using these methods, there are factors that you need to take into consideration.
- Economic climate - The buyer must need to be cautious when buying a business during these hard times when economics are slow.
- Fixed assets - Assets can definitely add value to the business. However this can be difficult because the prices of property may rise or fall. Many of these assets like vehicles and equipment may worth less than what is expected.
- Intangible assets - There are parts of your business that would not appear on any balance sheet. This includes trademark, reputation, branding and size of customer base. Rapid growth of business is clearly attractive to buyers.
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