Determining Business Value
A realistic business valuation requires more than merely looking at last year's financial statement; it requires a thorough analysis of several years of the business operation and an opinion about the future outlook of the industry, the economy, and how the subject company will compete. Most people believe that a business should be sold for fair market value.
There are a number of different methods to determine a fair and equitable price for the sale of the business. The following are a few methods to determine the price:
- Capitalized Earning Approach. This method bases the value on the return on the investment that is expected by an investor.
- Excess Earning Method. This method is similar to the capitalized earning method, except that it splits off return on assets from other earnings.
- Cash Flow Method. This method is usually used when attempting to determine how much of a loan the cash flow of the business will support. The adjusted cash flow is used as a benchmark to measure the firm's ability to service debt.
- Tangible Assets (Balance Sheet) Method. This method values the business by the tangible assets.
- Value of Specific Intangible Assets Method. This method is based upon the buyer's buying a wanted intangible asset versus creating it. This method also takes into consideration valuing the goodwill of the business.
References:
• Small Business Administration
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