Business & Commercial Law
What is Your Business Worth?
- Income Valuation: as the name implies, this method of valuing a business looks at the anticipated future income of the business. A formula is then applied that discounts future earnings to present day levels to come up with a fair market price for the business.
- Asset Valuation: an asset valuation looks at all the individual parts of a business, values them and adds them together to come to a fair market value. In other words, according to the asset valuation method, the total value of a business is the sum of all of its tangible parts. However, this method does not include things such as name recognition or customer goodwill that are intangible, yet valuable, to the existing business and potential buyers.
- Industry Formulas or Standards: some industries have general standards for valuing business. Some, for example, use the three year rule which values a business at three times the average income of the business over the past three years. Industry formulas and standards must be carefully reviewed if you choose to use this approach so that you are not undervaluing or overvaluing your business. For example, if the economy is coming out of a recession that hurt your business then your income over the past three years may not be truly indicative of how much your company is worth.
- Comparable Sales: another way to value a company is to consider the sales of recently sold companies. This is valuable information because it gives you information about how much potential buyers are willing to pay. However, it is important to carefully compare the comparable sales to your own business and to ensure that your price appropriately reflects the differences in your business and the comparable sales.
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