Business Valuation: Methods Used to Calculate Value

There are a few parts of the business sale process that are extremely important for any business owner, and proper valuation of the company is at or near the top of any such list. And while you might have invested years of your time and effort into this business, it's vital to be able to approach this process with as objective an eye as possible, as setting a fair market valuation will have a big impact on your chances of a quality sale.

At Utah Business Consultants, we're happy to assist our clients in exactly these areas. Our business valuation services are second to none in Utah, with local business brokers who understand the ins and outs of the market and will help you attain a fair-but-beneficial valuation that works for you and also makes your business likely to be sold. In this two-part blog series, we'll go over some simple tips we often provide clients on this process -- today's part one will go over a few common methods of business valuation you may take, while part two will look at some general tips we offer regardless of which specific method you use.

Meta Description: What are some basic tips for ensuring your business valuation is done properly if you’re preparing to sell? Here are some methods.Income-Based Business Valuation

Perhaps the most common form of business valuation is one that's based on projected future cash flow and earnings, which is also commonly called an income-based valuation. This number is arrived at by looking at the business' past performance, as well as its current and projected future state.

In order to come up with this estimate, the valuator will need to have intimate knowledge of your industry, your company's financials, and where it stands in the market. They'll also need to make some assumptions about future growth, which is why this form of valuation can be less accurate the further out you try to project.

Asset-Based Valuation

Another common form of business valuation looks at a company's assets rather than its income. This number is arrived at by valuing all of the tangible and intangible assets that the business owns, and then subtracting any debts or liabilities. This valuation method can be helpful if your business is in a slow growth period or has recently experienced some financial difficulties.

It's important to keep in mind that this form of valuation doesn't always give an accurate picture of a business' true value, as it doesn't take into account things like future earnings potential or the value of the company's brand. However, for many situations, it's a viable process for business owners to use.

Market-Based Valuation

This form of valuation looks at what similar businesses have sold for in the past, and then uses that information to arrive at a valuation for your business. This method can be helpful if you're selling a business in a well-established industry where there is a lot of data available on past sales.

To use this method, the valuator will need to find comparable sales of businesses in your industry and region, and then adjust for things like size, growth potential, and profitability. This valuation method can be tricky to get right, but when done correctly it can give you a good sense of what your business might be worth on the open market.

For more on the forms of business valuation you should consider, or to learn about any of our exit planning or business valuation services, speak to the team at Utah Business Consultants today.

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