February 24, 2021 Last updated February 24th, 2021 471 Reads share

5 Common Business Valuation Methods

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If you are selling your business, you have probably noticed that it involves quite a bit of research and paperwork. Selling a business is difficult and time-consuming. Hence, it is always a good idea to hire a business broker who can help guide you through the process.

When you are ready to hire a business broker, you will want to be able to make an informed decision. You should ask them about their background and the amount of time they have to devote to your business. You should also be informed about the normal methods used to determine the value of a company.

1. Historic Earnings

When a historic earnings method is used, the company’s past gross income will be taken into consideration. They will also look at whether or not that company could keep up with its bills. if you owned a fledgling business and you were unable to pay your bills, this is probably not the best way to value your business.

It is very important to bring your bills up to date if you are thinking of selling your business. Your business’s ability to liquidate assets will also be taken into consideration with this method.

if you wish to employ this method you will need balance sheets and income statements from the last three to five years. The goal of this method is to find out if the income and operating expenses exceed the amount of profit a company is likely to bring in.

2. Value That Is Based on Assets

If you use this method you will add up the value of everything that is owned by the business. You will list all of the inventory you have, every piece of office equipment that you own, and the property owned by the business.

This is a very simple method of valuation as all you have to do is subtract the number and amount of the business’s debts. This method is used when a company has kept excellent business records. No one will want to buy a business in this situation without meticulous documentation.

3. The Future Cash Flow

Although it may seem as though you need a crystal ball to foresee the cash flow of a business, this is considered a practical and rather conservative method of predicting a business’s value. The method simply considers the current cash flow and the projected cash flow in the future.

Using this method will depend upon certain factors such as how many years of future cash flow you are trying to predict. The way inflation will impact the cash flow must also be considered.

4. Bottom Line Profits

As its name would suggest, this method is based entirely on the profitability of the business.  When a company or individual buys your company they will give you several times the value of the business. Occasionally, they will use bottom line profits before taxes, if the buyer and seller handle paying taxes differently.

When investors put money into a business, they will often look at bottom line profits. Stockbrokers are also known to recommend this method to their clients. They will screen all potential buyers to make sure they are financially able to buy the business.

5. Location, Location, and Location

If someone has a retail store, a restaurant, or an apartment building in a great location, someone who thinks they can run it better may want to buy it.  They may own a chain that can incorporate a small shop. This is how mom and pop taco joints get turned into Del Tacos.

No matter what method you use to value your company, the more information you can present a potential buyer with the better. Researching your market is important as well. Hiring a qualified business attorney and a business broker is critical to a smooth and timely transaction. here is more about business selling.

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Martins S

Martins S

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