How To Do A Business Valuation

Putting a price on your valued business is a dreadful task, especially if your purpose is putting it up for sale. However, this action might be a crucial step for your career. If something is valuable, it should be worth more! But that is not usually the case, especially if you are planning to sell it. Selling your business is a huge financial transaction. 

You need to know how much your business’s worth is. Most certainly, you need to know how to do a business valuation before putting a price on your most valuable asset. If you’re planning on selling your business, this article will share the best three ways valuation methods and when to start selling your business. 

When To Sell Your Business

Value and price seem to go hand in hand. The bigger the value, the higher the price; the lower the value, the lower the price. Selling something you value is even worse but might be an essential one. Selling something valuable does not necessarily mean value depreciation but rather an opportunity of making more profit. If your business is your most valuable asset, selling it for a certain amount won’t come easy. 

No More Passion

You may have started your business with bright plans for the future, but after years of trying and succeeding, that spark soon faded. Are you still passionate enough to keep going?

Profitable

High sales and profits are what attract potential buyers. If your business is at its peak and is earning well then, it is probably the best time to put it on the market.

Personal Reasons

You may have encountered a bump in your life or have issues with your subordinates that will prompt you to sell your business. Make these unfortunate situations a profitable one for your business.
Before putting a price on your business, it must be in great condition, and you should know how to calculate the valuation of a business. Place yourself in the shoes of your potential buyers. Identify its features and possible flaws, take this opportunity to settle all previous business transactions. This will make your business worthy of its value and attract potential buyers with the best price! 

How To Do A Business Valuation

Business valuation is a method/process of determining the economic value of a business. To settle a common ground between both parties, a business valuation can be utilized. For the business transaction to be worthy and profitable, you need to understand how to do a business valuation on different business valuation methods.  Here are three known valuation methods to guide you to the right price for your business.

Asset-based Approach

An asset-based approach is a valuation method that estimates the price/value through its total number of investments. This method can be approached in two ways:

  • A going concern asset-based approach reviews your company’s balance sheets, lists your company’s total assets, and subtracts its total liabilities.
  • A liquidation asset-based approach will determine the liquidation value/net cash from your company when all assets and liabilities were sold and paid off.

This approach works best on corporations where the assets owned by the company are also part of the business’ sale.

Earning Value Approach

Another way on how to do a business valuation is through earning value approach. This process determines business value through their ability to produce wealth in the future. This method can be classified into two approaches:

  • Capitalize earnings – using the company’s previous records on their past earnings, normalizing them, and then dividing annual income through a capitalization rate.
  • Discounting future earnings – instead of using the company’s past records, this method focuses on its future cash flows, then divides it with the same capitalization rate.

Market Value Approach

The market value approach establishes business value through comparison with similar companies that are recently sold. This valuation method only works best when there are enough companies to be compared to.  Every business owner has it differently. Circumstances may vary but choosing the right valuation method can determine the direction of your business and sales. Make sure to pick a suitable method in selling your business. Commit yourself to find the perfect buyer who will buy your business at the right price. Sell your business for its worth and turn your most valuable asset into their most valuable asset.

Conclusion

Selling your business for the right price is mostly a negotiation between you and the buyer. In these transactions, both the buyer and the seller should be able to effectively correspond to each other’s concerns and suggestions. As the seller, you wouldn’t want to settle for less of its actual worth. 

On the other hand, your potential buyer would want their transaction to bear profit from your business from maximizing every cent of their money. That’s why understanding how to do a business valuation is important when you’re on the market.

Learn more about business negotiations here!