Determining the Fair Market Value of Your Business

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Whether you’re simply dreaming of retirement or negotiating a mind-boggling purchase agreement, determining the value of your business is important. But how would you determine the fair market value of your business? The answer depends on your needs and goals.

Determining the Value of Your Business

The most effective way to determine the value of your business is through a sale. In other words, perhaps the best way to know your company’s value is to sell it at a price that satisfies both you and the buyer.

But consider the possibility that you’d rather not sell. Or perhaps you don’t know if you need to sell or want to sell. How would you determine the value of your company then? The answer depends on your needs and goals.

Getting a Rough Estimate of the Value of Your Business

If you’re really just fantasizing about retirement and need a rough approximation of the value of your business, chances are there’s an association in your industry that can give you general guidelines on request.

Usually the organization will communicate this information as a historical record of recent trades and their total profits. Keep in mind, however, that these are only rules of thumb. They are notoriously contradictory, leaving you with only an estimate. This approximate estimate will be useless for any reason other than satisfying your curiosity—and not very well at that.

You can also use one of the many business valuation programs available such as Flippa. An internet search will turn up a few that you could use to find out the value of your business. You enter some resource and payment data into the product from your budget summaries or annual appraisal forms. Then the site’s numbers indicate an expected value. While this strategy is preferable to a guideline, it won’t really help you with a proper business valuation.

If You Are Sure You Want to Sell Your Business

If you are really sure you want to sell your business, you can contact a local dealer. They usually get their cost when they work with your company’s business. They will often do an assessment for you at near zero cost. You need this data to set an estimate. Just don’t waste your time if you really would rather not sell. Many merchants won’t give you value until you list your business for sale. Or they will charge you for valuation if you don’t list your business with them.

If you are sure you want to sell, then you’re going to need a proper company valuation. There are many business valuation professionals who can do a valuation for you.

Approaches to Determining the Value of Your Business

There are three basic approaches to valuing your business.

The Asset Approach to Setting a Value on Your Business

The asset approach follows the replacement policy. This means that no reasonable buyer or financier would pay more for a given deal than the cost to mimic it across the street.

The fundamental flaw of the asset approach is that it does not work effectively to capture intangibles such as the trust you have established with your clients. How you and your agents treat your customers and how you stand in the market is not easy to copy. However, trust and other intangibles are not necessarily included when you’re using the asset approach.

So be careful with the limitations of this approach. Note that while an asset approach is a general sign of value for organizations with exceptional asset concentration, it may only serve as a liquidation value for your administratively organized organization. The income approach and the market approach better capture the value of your organization’s intangible assets.

The Income Approach to Determining the Value of Your Business

The income approach works on the assumption that a buyer is paying for the income that you expect your business to deliver from the date of the offer. In other words, buyers buy income. The amount they pay to access your income stream depends on the risk the buyer is willing to take that they will really receive that income stream when you leave the store.

If your business has a reliable history of consistent income and development, a buyer is likely to pay more for your income stream because it represents less risk for them.

On the other hand, a buyer who believes they’re taking a greater risk will want to pay less. For example, this could be the case for businesses in which the income fluctuates seasonally. The same could be said if you cannot reasonably expect your business to maintain steady income over consecutive periods, as this would represent even greater risk for a buyer.

By appreciating your organization’s income, you inherently appreciate everything your organization does.

If your organization achieved something different than expected, your income would seem unique and the value of your business would be different. For example, if you and your partners agreed on different decisions or began working from a different mindset, then the value of your business would change.

Basically, your income reflects every decision you make within your business.

So here’s a question for you: If the decisions you make aren’t increasing your income (and buyers are only paying you for your income), why would you say you are participating in these exercises if they do not bring an extended income? They don’t improve your organization.

The Market Approach to Determining the Value of Your Business

The third approach is the market approach.

If you own a home or rent a condo, you’ve done some sort of market approach. When you look at comparable properties and then use that information to value your property, you are performing a market approach. For private property, you might be thinking about things like cost per square foot. Also, you might add value for additional bedrooms and bathrooms.

If you are looking at properties comparable to your home, compare the square footage, number of bathrooms, and number of bedrooms in your home to get an estimate of the value for your property.

You can do exactly the same with companies. However, as you might have guessed, the value of your business does not depend on its space and toilets. It is driven by various measurements like income, wealth, development, influence, revenue, liquidity, and so on.

Public companies and exchanges, including other members of the private sector, provide an understanding of how value is related to the various monetary measures of these organizations. Then, similarly to valuing your home, you apply these measurements to your business’s measurements to determine an estimate of its market value.

Last Words

As with most things in the business world, you get what you pay for when it comes to determining the value of your business. For this reason, value your business on Flippa.

Getting an exceptional rough approximation of your company’s honest appraisal could cost you next to nothing. In contrast, it costs a great deal of money to have a complete appraisal carried out by a specialist who can testify in court if necessary. So consult an attorney, accountant, or other professional advisor and choose the course that is most appropriate for your circumstances.

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