Business Valuation Quick Tips
#1 Valuing a Profitable Business
You only need 2 things. The accurate profit of the business and a number to multiply that profit by it is simple as that.
#2 Asset Valuation Method
When valuing a business that is not profitable it is worth asset-value only. There are many asset valuation methods. See tip #3 for a list of those methods.
#3 Value a Business – Asset Valuation Method.
Use one of these methods when valuing a business on its assets. Liquidation value – that is what you could sell the assets for immediately. Going concern value – it’s value of the assets installed, in situ, attracting greater value for the fact that they are installed, operational, and in many cases utilities connected. Depreciated value – the value of assets after allowance for legal depreciation under local tax laws.
#4 Value a Business – Income Method – Valuing Future Profits.
Historical profits are a good guide, but only a guide. How far back you should consider history in determining value here depends on the circumstances of the valuation.
#5 Business Valuation: Income Method – Goodwill.
Don’t value goodwill separately. Goodwill is just the difference between the value of the assets and he value of the business. Business value = Goodwill + Asset Value. It’s a simple equation.
#6 Value a Business – Market Method.
This method pays attention to other sales in the marketplace of comparable businesses. The more data you have about comparable sales, the more valuable is this method. No two businesses are alike, however. The Market Method is at its most reliable when providing you with a range of values from which you may choose one.
#7 Value a Business – “Cost to Create” Method.
This method values a business according to what it would cost to start the business and bring it to its current stage. The costs you bring in include establishment, by materials and equipment, leasing, staff recruitment, marketing and other costs. This is a useful method since many people look at the alternative of creating their own business instead of buying someone else’s.
#8 Value a Business – Discounted Cash Flow Method.
You use this method when there are cash surpluses or the reasonable anticipation of cash surpluses into the future. This method only measures cash in and cash out and calculated the difference. If there are cash flow surpluses in the future, the value of those surpluses are valued in today’s dollars to give us today’s valuation figure. It takes into account all future costs, including capital costs.
#9 Value a Business – Definition of Income.
When using the income/Profit method, be careful when trying to arrive at what the income is. There are many definitions of income or profit. You either work with profit including owners wage or profit after owners wage has been deducted. The multiplier changes according to which income you are working with. If you are using the profit after owners wage has been deducted, the multiple will be larger. This is where many people go wrong.
#10 Value a Business – 3 Keys.
The three main things that affect business value are profitability, maintainability of profit and transferability of profit. Unless you have all of these, you won’t have much value in the business. See other tips for definitions of these key terms.
#11 Value a Business: Key – Profitability.
When valuing a business according to its income, there needs to be at least some profitability. If the business has no profit, it only has asset value. The profit must be visible and provable, not just arguable.
#11 Value a Business: Key – Profitability.
When valuing a business according to its income, there needs to be at least some profitability. If the business has no profit, it only has asset value. The profit must be visible and provable, not just arguable.
#13 Value a Business: Key – Transferability.
A business has no value if the income of the business can’t be transferred to another person. If the income is tied to the current owner there is no value to be transferred.
#14 Value a Business – Adjust the Net Profit.
When valuing a business using the income or profit method, arrive at the adjusted net profit of the business. This is the profit that a new owner should be able to expect the receive from the business. It is the profit before interest and tax. It is the profit adjusted for one-off, abnormal or personal items.
#15 Value a Business – It’s Dynamic.
Valuing a business is not a static thing. Business value changes from month to month and quarter to quarter. Fortunes of the business fluctuate along with changes in the industry and the economy. Usually the most up-to—date information is the most reliable when it comes to evidence upon which you are going to base a business valuation.
#16 Value a Business – Which Method?
How many methods can you use at the one time? You can use any method in combination with any other method as long as they are relevant. You will often see the income method combined with the market method and compared to the rule of thumb method. This is valid. It is allowable to average the results found by the different methods or to weight one method over the other if that is appropriate.
