What is Business Valuation?
Our team at Prosper Financial will help you understand business valuation, the various methods available to and guide you in getting your business valuated for a fair price.
What is Business Valuation?
As a business owner, no one understands the operation of your business better than you. You’ve put countless hours of hard work into developing your business, so its daily management, products, services and customers are extremely important to you.
You know the ins and outs of your business, but do you know what it’s worth? Do you know why understanding the worth of your business is important, even if selling is not currently on your mind?
Why is Business Valuation Necessary?
A lot of factors go into determining the value of a business, including overall worth, debts, liabilities, and assets. Business valuation is essential to understanding your place in the current marketing and your industry. Business valuation also helps you to plan for the future and determine the best course of action should an unforeseen circumstance arrive, like a market crash or the unexpected passing of an owner. In addition, the IRS will need to know the value of your business for tax purposes.
Business Valuation Methods
The three most common valuation methods used are:
- The earnings value (or income) approach. This approach centers around the main purpose of operating a business: to make money. This can be carried out in two ways: discounted future earnings method or capitalized past earnings. The discounted future earnings are based on the average prediction of future earnings and then divided by the discount rate of expected return based on the risk of the company. Alternatively, the Capitalized past earnings method focuses on the expected income for the future based on the company’s past earnings. That income is then multiplied by the capitalization factor.
- Assets-based approach. The assets-based approach is relatively straightforward. It is the process of adding up assets of the business and then deducting any liabilities.
- Market value. The market value approach can be a more intricate method of valuing a business, as it relies on examining the value of businesses similar to yours in your area. For example, the value of a bakery may be determined by looking at the revenue of other bakeries within a 50 miles radius and identifying the similarities and differences compared to the bakery that is being valuated. Depending on the market turnover of similar businesses in the area, this method may not be a viable option.
Contact Us Today to Learn Why Business Valuation is Important
Prosper Financial believes that an accurate business valuation is an essential part of planning for the future of your business. To learn more about this process, reach out to us today.
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