How to Valuate a Business

There are times when a business has reached a certain level and the owner wants to sell it for whatever reason. Before selling a company it is imperative that it is valuated so as to arrive at its fair value. There are also times when a business owner wants to get a business valuated for reasons other than selling it.

Business valuation is primarily an estimation of the monetary value of an owner’s financial interest. While business owners want a valuation done for getting the best price, interested parties use business valuation for determining how much they are willing to pay. It is also used for resolving legal issues. These include divorce litigations, estate and gift taxation disputes and determining owner’s interest for buy-sell agreements.

Business valuation is basically a simple process and involves understanding how to read a company’s balance sheet. Simply stated, the value of a business is equal to assets minus liabilities. Assets include fixed assets like land and building, cars equipment, machinery and tools, current assets such as cash, bank balance and receivables any other asset specific to the business. Liabilities include suppliers credit and whatever loans owed by the company.

The problem however is that most business owners do not realize that there are certain elements outside the balance sheet that must necessarily be taken into consideration.

The most important among these is the current value of fixed assets. The value of fixed assets in the balance sheet is usually the depreciated value. It may not be anywhere near the actual market value as depreciation is usually accounted for at the rate at which it is to be claimed as deduction while filing tax returns. The actual market value of an asset may actually be more than what is reflected in the balance sheets, for example machinery bought some time back whose price has been increased by the manufacturer. There are also some assets like land that do not depreciate but actually appreciate in the long term.

The asset based approach is just one of the several approaches for business valuation. Much depends upon the nature of business. Many modern Internet based businesses operate without any tangible assets. In such cases the value of a business is done on the basis of intangible assets such as goodwill, brand value and future earning potential. Brand valuation is a tricky matter and subject matter for experts in business valuation. If the company does not own a brand, there is always an element of goodwill attached to a successful business venture. There is a set formula based on past earnings for determining a business’ goodwill.



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