Business > How to Value your Business

| February 4, 2015

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Chip Harp, Valdosta Today Business Editor:

Here are the three most common ways professionals calculate how much a business is worth:

Asset Approach:

This method basically determines a business’ value by adding up the sum of its many parts. This is “the most predictable” of the three main valuation models, since any good accountant can add up all the assets, depreciate them, and come up with a number.

Income Approach(es):

Generally, these methods determine value by calculating the net present value of the benefit stream generated by a business. These are more technical in discounting future cash flows, applying multipliers to EBIDA [Earnings Before Interest, Depreciation, and Amortization], and trying to use all the techniques that stock analysts use to value public companies.

Market Approach(es):

These methods tend to determine value by comparing the soon-to-be-for-sale business to others in the same industry, of the same size, and within the same area. The market approach is the most subjective, trying to factor the size of the opportunity, market conditions that control comparables, and goodwill associated with customer connections, team experience, and more.

WHICH DO YOU CHOSE?

Use a multiple valuation method. Choose the best points of each method and weave a valuation from that. However, most businesses are on-going concerns so income will usually be the best indicator of value.

More Art than Science. For small companies factors other than just income or assets come into play, such as goodwill, experience, and management expertise. These, however, are often times more subjective to value.

Use an independent source. Buyers will either trust their own valuation or one done by someone not involved in the transaction. Independently evaluate the financials (and their integrity) and walk through to a point of real cash flow of the business.

Make sure you agree with the valuation. Don’t understand how a value is obtained? Make sure your questions are answered and you can see the investment and corresponding return.

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