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Evaluating a Business' Worth

The value of a business is subjective. Financial experts use different methods to determine how much a company is worth, with each method producing varying numbers. Some methods are complex and some are relatively easy. Business owners can estimate the value of their company by using one of the following simple methods.

Assets

Businesses that hold many assets can be valued by the total worth of the assets. This can be an effective method for evaluating companies that own real property or that have a large inventory. Get a professional appraisal if you are unsure how much your business assets are worth. Look over your inventory sheets, property records, and ledgers to calculate your business’s total asset worth.

Liquidation Value

Businesses with a large amount of assets can place a liquidation value on the company. Typically, the business liabilities are subtracted from the total value of the assets to reach the final amount the business is worth. For example, if a business owns $800,000 in assets, and has $50,000 in business liabilities, the company has a value of $750,000. When using the liquidation method to find out what your business is worth, value saleable inventory by the profit margin the business will keep after the sale. Hire a real estate appraiser to determine the value of real estate. Deduct 20 percent from the value off business operating equipment that will be sold used.

Revenue in Multiples

One way of determining the value of a business is to multiply the annual revenue. There is no standard amount the revenue is multiplied by. Some people multiply the revenue by 1, some 2 and others 3. For example, if a company has an annual revenue of $100,000 and multiplies by 3, the company’s value is $300,000. The most accurate way to use the revenue in multiples method is to find out what multiple other similar businesses are using in your area. Another discrepancy in the revenue in multiples method of valuing a business is that some people calculate the revenue before taxes and some after taxes. Talk to a business accountant, business manager or stockbroker in your area to find out what variables comparable businesses in your area are using to value their businesses using the revenue in multiples method.

Projecting Future Profits

A business’s profit and loss statement can be useful in determining the value of the company. Calculate the yearly profit of your business, after expenses and taxes to determine your annual profit margin. To get a rough estimate of future profits, the U.S. Small Business Association recommends that you “divide your current annual profit by the long-term treasury bill interest rate.”

Comparison to Other Businesses

By looking at the sales similar businesses in your area, you can estimate how much your company is worth in the current market.

Others Factors That Affect the Value of Your Business

Intangible Assets

Intangible assets, such as long-term customer contracts and mailing lists, can increase the value of a business. The key is to project how much money the contracts and mailing lists will likely bring to the company, and add that profit to the business’s value.

Location

A company that is in a desirable location will have a higher value than one that is in a poor location.

An Established Business

An established business that has a long history of stability and profits is more valuable than a newer business, because it poses less risk to potential buyers.

What the Buyer is Willing to Pay

The most important factor when placing a value on your business, is considering what the buyer is willing to pay. Your business is only worth what a person will buy it for. The economy plays one factor in what a buyer is willing to pay. Buyers generally take fewer risks, and are looking for a deal in a down economy. Expect to sell your business for a smaller amount during a recession.

LINKS TO RESOURCES

Inventory Management Assessment Tool

http://www.docstoc.com/docs/76139087/Inventory-Management-Spreadsheet

Major Components of a Profit and Loss Statement

http://www.docstoc.com/docs/5258800/Major-Components-of-a-Profit-and-Loss-Statement

Blank Profit and Loss Statment

http://www.docstoc.com/docs/280347/Blank-Profit-and-Loss-Statement

References

U.S. Small Business Administration: How Much is My Business Worth?

http://community.sba.gov/community/blogs/community-blogs/small-business-cents/how-much-my-business-worth

DocStoc: How Much is My Business Worth

http://www.docstoc.com/docs/29650608/How-much-is-my-business-worth

Wharton Small Business Development Center; Wharton University of Pennsylvania: Frequently Asked Questions

http://whartonsbdc.wharton.upenn.edu/faq.html#12G

 
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