“What is my business worth?”
There are a lot of reasons you are scratching your head and asking “What is my business worth?” Maybe you’re getting out of the biz but plan to sell your operation to someone else who will continue to run it. You’d need to know what its earning power is to create a legitimate price tag for it.
You could be wondering, “What is my business worth?” because you’re contemplating liquidating your business and need to know if your assets could pay off your debtors. In this case, the earning power of your business really doesn’t matter, so even though you’d still use a small business valuation appraisal, the calculation would be totally different, and the final valuation would look a lot different than the previous example.
In addition to those two examples, you might also need a business valuation to qualify for a loan to start or grow your new business. Since you’re new, you don’t have a track record of earning power to establish your valuation. All new businesses tend to have more debt than assets, so comparing the value of your assets to the amount of your debt wouldn’t really show your value (not to mention you want to show the lenders how much money you could earn, not how much already have!). In this case, you might look to the income statements of other similar businesses in your industry to show how much money you could generate. The methodology here is totally different than the previous examples, and once again, create a different (but equally valid) valuation.
In order to answer the question “What is my business worth?” you have to answer the question, “Why do I need a business valuation?” Let’s go over the different approaches you might use:
Three Business Valuation Approaches
- Valuation Income Approach
This valuation approach uses your historical financial statements to establish how much income your business generates, and how much it will likely generate in the future. You might have relatively few assets, or your counterparts in the business might not generate as much income as you have been able to, but the proof is in the pudding. Your business’s ability to make money speaks for itself.
Reasons You’d Want This Approach- To determine a sale price if you were trying to sell your business to someone else who will continue running it.
- To generate capital from investors who would give you cash in exchange for ownership of your business.
- Valuation Asset Approach
The valuation asset approach calculates the market value of your assets in contrast to the amount that you owe your debtors to determine the physical value of your business. This seems straightforward, but determining the market value of your assets is a bit complicated, since the amount you could liquidate them depends on the state of the market, the condition of your assets, and whether or not there is anyone who wants to pay money to acquire them. This is why it is beneficial to use expert small business valuation resources when creating a valuation.
Reasons You’d Want This Approach- To determine what you would be able to repay your debtors if you filed bankruptcy.
- To leverage equity you have in your business to qualify for a loan to expand it.
- For tax purposes if a new owner inherited a business, or to determine the value of a business that was being split as a result of a divorce or divided estate.
- Valuation Market Approach
This approach analyzes public financial reports from other similar-size businesses in your industry to determine what your financial reports might look like down the road. This approach is helpful if your business doesn’t have its own financial history to represent how much it could make in the future. Sometimes the most accurate valuation combines the income approach and the market approach, to show how much your business could generate based on how much you tend to make and how much similar businesses tend to make.
Reasons You’d Want This Approach- To qualify for a loan to start a business when you don’t have any financial history established.
- To generate investors in exchange for ownership in your business when you’re just getting started.
Do you have any other questions about which business valuation approach to use? Please share in the comment section below!
