How to find your business’s fair market value
What is my company’s worth?
If you’re a small business owner, you’ve probably wondered at some point what your business is worth. Are you considering selling your business, or do you just want to know how much it’s worth for estate planning, exit strategy planning, or insurance purposes?
Your company is worth more than its book value. Let’s learn how to find your business’s fair market value.
Please read our guide on business valuations.
Determine my business’s worth.
Whatever the reason, knowing your business’s value is crucial. It is especially important for making informed decisions about growth or transitioning to the future. However, your firm’s true valuation can vary widely. These value variations will depend on the industry, size, location, and financial performance of the business. The consistency and predictability of your cash flow is a critical component, too.
In this article, we’ll dive into the various factors that go into determining the value of your business. We will also talk about how to get a business valuation.
First, what is a business valuation?
A business valuation involves analyzing a company’s financial performance, cash flows, assets, liabilities, and market conditions to determine its fair market value. Valuation firms like BA FL|GA|HI usually conduct these valuations.
Several approaches to business valuation exist, including the income approach, the market approach, and the asset-based approach.
Please read our article what is a business valuation.
Why should I get a business valuation?
There are many reasons why getting an appraisal of your business will be beneficial.
For example, you may need a legitimate appraisal to obtain a business loan. This is often the case if the lender is a traditional bank. You may also seek a valuation to establish a partnership, settle ownership disputes, or bring in a third-party investor. You may even need a business appraisal if you plan to gift a portion or more of your business for estate planning purposes.
However, the small business owner may not always order such valuations. An entity may require an independent business appraisal for its purposes. These entities include commercial lenders, SBA lenders, legal practitioners, tax officials, and the court.
Here is our short guide on choosing a business valuation company.
What factors determine the value of my business?
Many factors must be assessed to determine the value of your business. Some of those include:
- Revenue and profitability: Considering the revenue and profitability of your business is extremely important to understand its value. Businesses that generate higher revenue and profits are worth more than those that do not. Your adjusted net income is an important matrix. Your discounted cash flow to present value is a major variable to sophisticated investors.
- Industry: The industry in which your business operates in also plays a significant role in determining its value. How your gross profit compares to your peers can give you a higher multiple of earnings.
- Market conditions: The current market conditions may also impact the value of your business. A strong economy with low-interest rates, for example, may lead to higher valuations. Conversely, a weak economy with high-interest rates may lead to lower valuations.
- Growth potential: Your business’s growth potential is another critical factor in determining its value. If your business has a lot of potential for growth in revenue, market share, or expansion opportunities, then it may be worth more than a small business that has reached its full potential. Your business model and execution make a difference.
- Intellectual Property: Owning intellectual property such as patents, trademarks, or copyrights can add significant value to your business. The amount of cash flow your IP generates matters a great deal, too.
- Business Assets: Your business’s assets, such as equipment, real estate, and inventory, also contribute to its value. A business with significant assets will likely have a higher value than a comparable business. The strength of your balance sheet is an important variable in your value.
- Business Liabilities: It is important to know your business’s liabilities. Liabilities, such as outstanding loans or legal disputes, can decrease their value.
Please read what should be included in a business valuation.
How do you get a company valuation?
Now that you understand the factors that determine your business’s value, consider obtaining a business valuation to determine its worth.
Business valuation experts are professionals who specialize in valuing businesses. We have expertise in business valuations for SBA loans and exit strategy planning.
A certified business valuation by an accredited Business Appraisal FL|GA|HI team member takes strategic and in-depth analysis to determine an accurate estimation of a company’s worth.
Our team uses numerous business valuation methods to set a sale price and decide whether a potential buyer’s or investor’s bid is fair. Valuing a business takes more than just several numbers. However, the purchaser’s and their lender’s valuation are the most critical factor influencing a buy-side valuation.
Please read what is a business valuation professional.
Small Business Valuation Considerations
Note that there are various things you should consider when choosing a business valuation firm. Of all the factors, you should be most concerned with a firm’s accreditation, experience, and cost.
Valuation Accreditation: A certified business valuation by an accredited business appraiser should be your utmost priority. An accredited expert can easily show that he or she has advanced experience and knowledge. These aspects are required to deliver reliable and quality business valuations.
Valuation Experience: A skilled business valuation firm has access to up-to-date economic data and relevant information that can potentially support valuation discounts. The greater the assets of an experienced business appraisal company, the better it can assist you in obtaining the accurate value for your business.
Valuation Cost: Business valuation costs may vary greatly. They may depend on the size of the company, the purpose, the nature of the valuation methodology, and the difficulty of its operations. We will discuss in detail what business appraisals cost in the section below and in this business valuation cost article.
What about a free online business valuation calculator? You get what you pay for and they are good for cocktail party chatter and not much more to tell you what your business is worth.
Please read the differences in valuations between small and large companies.
What methods are used to value a company?
There are a various methods the professional business appraiser may use to assess the value of your business.
The best method for your business based valuation tends to depend on a variety of factors. Some of these factors include the size of your business, the industry, and your specific audience or needs.
1. Asset-based approach
The asset-based approach to business valuation is the simplest and most straightforward valuation method. We consider both your tangible assets and your intangible assets, such as intellectual property and patents.
It involves adding the value of all the business’s assets and subtracting the value of all its liabilities. Doing so will result in your business’s net worth. The net worth is often used as a starting point for other valuation methods.
However, it is essential to note that the asset-based approach is not always the most accurate valuation method. This is because it may fail to consider the value attained from the business’s intangible assets, such as its brand name, customer base, and intellectual property.
2. The income-based approach
The cash flow method or income-based approach to business valuation is more complex than the asset-based approach, but it does tend to be more accurate. We will do a discounted cash flow analysis of your business.
This approach involves estimating the future income the business will generate and then discounting that income back to the present day. Doing so provides insight into the present value of the business’s future income, which is its fair market value using a discount rate.
You can also read our discounted cash flow analysis article, or DCF, which is important to potential investors. Investors care how much free cash flow your business generates.
3. The market-based approach
The market-based approach to business valuation is based on the idea that the value of a particular business is determined by what other businesses of a similar size and in a similar industry are selling for. We will compare your business sales and net profits to those of your peers.
You can also read obtain a company valuation before you sell your business.
This approach is often used when no comparable businesses have recently sold or when the business is unique in a particular way. We will look at your earnings before interest, taxes, depreciation, and amortization or EBITDA.
To use the market-based approach, a professional appraiser must find comparable recently sold businesses. This data is often found by searching online databases or by contacting business brokers or investment bankers.
Once comparable businesses have been identified, their sale prices and future cash flows will be used to estimate the value of your own business and calculate the selling price.
How much does a business valuation cost?
A certified business valuation by an accredited Business Appraisal FL|GA|HI team member takes strategic and in-depth analysis to determine an accurate estimation of a company’s worth. The process is complex and involves various considerations, calculations, and studies.
As a result, you can expect to spend anywhere from $3,100 to $9,700, depending on the required work. Regardless, rest assured that working with a valuation company results in a comprehensive valuation report that will make the cost and wait worthwhile.
When justifying their asking price, please read what a business valuation cost should be for small business owners.
Please read our family exit article if your valuation is for a family sale or exit planning.
You can’t trust a business broker to give you the value of your business, invest in a certified business valaution that will meet SBA standards and hold up in court.
Determine My Business Selling Price Conclusion:
A reliable business valuation is crucial whether you need financing or succession planning. Obtain comprehensive economic knowledge of your business now for better decision-making in the future. The value of a business is worth more than its book value or net asset value.
Please read what you need to know about small business valuations for small business owners.
Business owners, contact BA FL|GA|HI today to find out what your company is worth through our professional valuation services.