Business valuation is a “subjective science” at best, and using the wrong method could deprive you from receiving millions of additional dollars for the rewards of your life’s work as a baby boomer entrepreneur.
However, strategic sales represent the minority of acquisitions, so most times the following three methods are used to determine the value of a business. Choosing the correct one for your business is critical.
Here are the three ways to appraise your business for the highest value.
Asset-based Method: This is the most basic way to value a business, and in most cases produces the least amount of value. For example, a landscaping company’s value is primarily based upon the estimated resale value of its assets (trucks and equipment), and less upon “goodwill”.
Goodwill is the difference between a company’s market value (what a buyer is willing to pay for the company) and the value of its net assets (assets minus liabilities).
Typically, companies have at least some “goodwill” and, therefore, you’ll get a higher valuation by using one of the other two methods described below.
Discounted Cash Flow Method: In this method, the acquirer estimates what is the future stream of the company’s cash flow worth to them today. The more predicable the future cash flow’s stability and growth, the higher the valuation.
Any hard assets of the company are assumed to be integral to the generation of cash flow and, therefore, not included separately in the calculation of the company’s valuation.
A money-losing bed and breakfast sitting on a $2 million piece of land is better off using an asset-based valuation method. Whereas, a professional services firm with a predicable, growing $500,000 in annual profits, but has minimal hard assets, will have a higher valuation using the discounted cash flow method or the comparables method described below.
Comparables Method: This method looks at the value of other comparable companies, which have sold recently. One of the difficulties encountered when using this method is locating valid comparables. This is why working with a Certified Value Builder™ who uses the Value Builder System™ can be beneficial. The System has a proprietary data base consisting of over 14,000 diversified small-to-medium size businesses, and can offer valid comps.
If you’re a business owner and interested in finding your current business value, CLICK HERE to request a free Value Builder Score report, which on a scale of 0 to 100 scores your business’s value drivers utilizing the data in the Value Builder System’s proprietary data base.