How to Value a Service Business
If you want to buy or sell a service business, it is important that you’re familiar with the different valuation methods that you can use like asset valuation, liquidation value, income capitalization, income multiple, and Rules of Thumb.
Pick the ideal method and get accurate figures that you can use as reference.
How to Valuate a Service Business?
Not all businesses offer products because you can also find ones that sell services. Some great examples are car wash, repair, and cleaning. If you’re interested to purchase an existing business or you have concerns pertaining to certain businesses, accurate appraising is very important. This is a challenging task but it is not pure science. In fact, it is also considered as an art these days. Oftentimes, there is a great difference between the perceived value of the owner and that of potential buyers or other interested parties.
When you try to value a service business, it is important that you get an accurate calculation so that you can determine if you’re going to get a reasonable ROI or return on investment. Valuing a business can be done in different ways which includes asset valuation, liquidation value, income capitalization, income multiple, and Rules of Thumb. Perhaps the most popular is the last one because most businesses are utilizing it to determine the value of their business. If you are going to purchase a small business, the asset valuation is not suitable. There are instances when a small business can earn more that their limited assets like office equipment and computers.
The second way is income capitalization and once again, this is suitable for large business valuations. In order to generate relevant and accurate valuation, you should look into the historical data of the business particularly the financial aspect. The primary consideration would be how much you can earn from the prospect business. Now, according to experts, it would be best to utilize the multiple methods if you want to purchase a small business. Still, this is a subjective method. If the business is able to earn considerable profits in the past, then you have a chance to earn almost the same amounts in the coming years or even higher with proper management.
The formula used for the Multiple Method is pre-tax profit plus the owner’s salary, plus the additional perks, plus interest, and plus the depreciation less capital expenditures. Again, you should be aware that business valuation clearly differs from one business to another. Whether you’re a business owner or you’re planning to purchase an existing business, you should know about business valuation. This is a requirement for most businesses and though challenging, its worth to know the value of your business. Learn the different ways to value a service business and use the right valuation method as much as possible.
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