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Business Tip of the Month

Business Tip
of the Month
For the month of February 2002

Get to know the value of your business (Part 1)

Almost every business owner wants to know the value of his or her business. What is the business worth if I want to sell it? What is the value for gift and estate tax purposes? What happens if I get divorced?

Unfortunately, there is no one formula that gives you the value of a going business. And it can be fairly costly to do a complete workup to nail down the value. But if you are looking for some ideas on how to determine what your business is worth, this brief summary may be helpful to you.

There are three main approaches to valuing a going business: 1) the market approach, 2) the asset approach, and 3) the income approach. Mind you, there are several variations on each of these approaches. And there are some very complex computations for which you will need professional help. But you might use one of the following approaches to value your business.

  • The market approach relies on finding recent sales of businesses similar to yours to determine what others have paid for your type of business. The challenge is in finding comparable businesses in your area.
  • The asset approach would seem to be of most interest where a business has little or no profit, but it has a list of valuable assets. Perhaps one of your competitors wants your assets and is unconcerned with your lack of profits. If your business has a track record of profits, you are more likely to value it based on the income approach.
  • The income approach is based on the future cash that will be available to the buyer. Assuming that your business doesn't have some hidden problem or an impending industry downturn, your track record of profits should serve to arrive at some rough valuation.

    If your business is well established and has a proven record of profits, you can use a multiple of those profits to help arrive at an overall value for the business. The challenge is to find the multiple appropriate for your type of business. In some cases, the multiple should be a function of gross sales instead of net profit.

This month we've focused on various methods used to value businesses. Next month, we'll discuss specific items that might affect your business's value. If you have questions or would like assistance with placing a value on your business, please call us.

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