The premier full service business brokerage since 1989
Utah Business Consultants
Across several settings, whether they involve selling a business or a number of other potential situations, the need to appraise a business and determine its precise value is extremely important. There are several methods when it comes to how to appraise a business, and knowing the most prudent approach for your company will be impactful on your sales process.
At Utah Business Consultants, we're proud to assist clients around Salt Lake City, Utah who are looking to sell a business, with comprehensive services ranging from business valuation to exit planning, sale negotiations and more. Here are a number of different methods often used to value a business in different settings, plus what to know about each of them and how to determine which is ideal for your company and situation.
One of the simplest, most standard methods of determining a business's value is to do a balance sheet analysis. This involves tallying up the company's assets and liabilities, then calculating the net worth or book value by subtracting the latter from the former.
While this can be a good starting point for understanding overall financial health, it doesn't paint an accurate picture of what a business is worth in terms of its potential profitabilities.
In certain situations, such as when selling off individual assets instead of an entire business entity, appraisals are based on asset values rather than projected revenue streams. In these cases, appraisers will need to consider both tangible assets (such as equipment) and intangible assets (such as patents or intellectual property) to determine a fair market value.
Another common method used to appraise a business is the earnings multiplier approach. This involves using the company's current profits over a certain period of time, then multiplying it by an industry-standard multiple or "cap rate" to obtain an estimated valuation.
While this can be a useful approach for companies with consistent profit margins and low risks, it may not provide an accurate picture for businesses in volatile industries or those with significant one-time expenses.
In some cases, determining the present value of future cash flows through discounted cash flow analysis can be helpful. This involves estimating future profits and then discounting them to present value using a chosen rate of return.
This method can be useful for businesses with consistent cash flow patterns, but it can be difficult to predict future revenues accurately.
Finally, one of the most widely-used methods for business appraisals is the market comparison approach. This involves looking at recent sales prices for similar companies within the same industry and geographic location, then using these figures as a benchmark for determining a business's value.
While this method has its limitations (such as not accounting for unique factors or circumstances), it can provide a good estimate when used in conjunction with other valuation methods.
As you can see, there are several robust methods for appraising a business. Ultimately, the best approach will depend on your specific circumstances and goals, as well as the expertise of your chosen appraiser. At Utah Business Consultants, we have years of experience helping business owners accurately determine their company's value and achieve successful sales. Contact us today to learn more about our services and how we can help you reach your financial objectives.