November 18, 2019
Most business owners will say that their business is worth $1 million dollars or more. Who wouldn’t when they invested so much time, energy and money into building a business? Even if the business is successful, it might not be worth $1 million dollars.
The best way to discover how much your business is really worth is to do a proper business valuation. Hire a professional who is certified in valuating businesses and has experience in your industry. People with the following credentials should be considered to do your valuation: Accredits in Business Valuation (ABV), Certified Business Valuation Analyst (CVA), Accredited Valuation Analyst (AVA), Member of the American Society of Appraisers (ASA), Chartered Financial Analyst (CFA) or Certified Public Accountant (CPA). Professionals that are trained in valuation techniques will determine the value of your business using proven methods instead of taking a best guess. In addition, they will factor in economic, industry and other considerations that may increase or decrease the value of your company.
There are four basic approaches to determine value of a business:
- Asset-Based – Calculates the value of all the assets of the business and arrives at the appropriate price.
- Income Multiple – Net income (profit/owner’s benefit/sellers cash flow) of a business is subject to a certain multiple to arrive at the selling price.
- Fair Market Value (FMV) – The reasonable selling price of a business, stock, real estate or other assets is used to determine the value of the business.
- Liquidation Value – The value of a company’s assets if they are forced to sell all of them in a short period of time is used to determine the value.
Although it is advisable to hire an expert to determine the value of your business, it is feasible to do it yourself. Here is a basic overview of the steps you will have to take:
- Calculate your business’s book value
- Determine your business’s market value
- Assess value using cash flows
- Analyze intangible assets
- Assess your business’s performance
When reviewing your company’s performance, look at your profitability, leverage position, past and future growth, financial ratios, and key performance indicators (KPIs).
Martin C. McCarthy, CPA, CCIFP
McCarthy & Company, PC
Disclaimer: This alert is for informational purposes only and does not constitute professional advice. Information contained in this communication is not intended or written to be used as tax advice, and cannot be used by the recipient to avoid penalties that may be imposed under the Internal Revenue Code. We strongly advise you to seek professional assistance with respect to your specific issue(s).