What is Your Business Worth?
Every business owner should have a solid idea of what his business is worth, whether he’s planning on selling it or not. The only problem is that a business owner can’t just decide what his own business is worth because he’s too close to it. An outside party must analyze all the factors and come up with an accurate business valuation.
A complete business valuation is made up of three main sections:
- A description of the current economic conditions. In the U.S., often the Beige Book, which is put together by the Federal Reserve, is used as a source for this information. Data collected by industry associations may also be used.
- An analysis of the company’s financial information. Elements like size, ratio, trend, and industry comparatives all play a role in developing the complete picture of a company’s financial position. Looking at certain financial information in different periods of time will indicate growth or decline and help with assessing risks.
- Financial statement normalization. Each company’s financial statements then will be normalized according to various factors, like a major event that probably won’t happen again, the elimination of cash from the balance sheet, and discretionary adjustments. The person doing the business valuation may also make adjustments for differences in the comparison to similar businesses that are due to geographical location, etc.
All of that information can be easily collected, but just trying to analyze it all is often biting off more than a business owner can chew. No owner can look at his business from the eyes of an outside party, so it is essential that someone else do the business valuation.
There are three main approaches that are commonly used in a business valuation. Each approach uses certain techniques to determine business valuation. For example, the income approach is about figuring out the fair market value of the business. The asset-based approach looks at the company’s assets and uses them to determine what the business is actually worth. The third approach is the market approach, which is where the value of comparable business comes into play. A complete business valuation should include the use of all three of these approaches, and the value shouldn’t vary greatly. However, all three provide useful information that will help any business owner make important decisions about where to go next.
Acceler8 offers business valuation services in Arizona. Managing partner Michael A. Johnston, CPA, CVA belongs to the National Association of Certified Valuation Analysts and is certified in business valuation.
