Accrual Accounting

Vital Things you Need to Know About Valuing a Business

Putting a value on a business is a separate function from auditing, evaluating or doing “due diligence.” There are three or more generally accepted methods of valuing a business. These are:

  • Comparable sales: What have other similar businesses with similar financial information sold for?

  • Based on net operating profit: This is sometimes called the “Rule of Thumb” method. This based on averaging many different companies in the same or similar industry. A value is given based on a multiple of seller’s net cash flow or seller’s discretionary income.
  • Based on gross sales: This is also called a “Rule of Thumb” but based on gross income or company sales rather than net cash flow.
  • Based on the fair market value of the assets: This method determines the replacement cost of the assets and good will of the company. When a business is closed or when the assets are worth far more than the value of the operating business.

What is the actual market value of a business?

Of course the key to coming up with a value for each of these methods is to start with correct data. Any computer is only as good as the information we put into it. This is very true of business valuations. Good information “in” will give you correct conclusions “out.”

Since a lot or a little amount, of the information given to buyers is junk, putting a value on a business is questionable, at best. We include on our valuation opinion letters that “based on the information provided we believe the value overall is $100,000. This is based on a combination of the various methods.” We provide our value for each of the methods.

We can update your Business Valuation….

If you later get more current information. The least expensive professional business appraisal firms out in the marketplace start at $1,700.00. The most expensive, do forensic audits and then appraise the business, for a cost of about $7,500. Business Owners use these reports for divorces, partnership liquidations, IRS purposes and to show to prospective buyers to justify their asking price. All the appraisers, except for the most expensive service, are using the financial data provided by the owner without any review of the source data.

We offer a basic valuation based on the provided data available at the time.

This can be done before a review or audit of the business has been done or it can be done after the business has been dissected and studied.

The report includes a review of the financial statements to determine their reliability.  Then based on the facts given, we will give you our opinion, and if you get better information at a later date, we will update the valuation at no additional charge.

We suggest that you do what the sellers do and use this report to explain or justify to a seller why you are offering the price you are. Remember, “What is good for the goose is good for the gander.”

How to value a business is difficult, if you have experienced any problems doing this yourself please feel free to let us know.

Creative Commons Attribution: Permission is granted to repost this article in its entirety with credit to Business Buying Services and a clickable link back to this page.

Image credit: castillodominici    istock

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