Business Valuations – How Much Is Your Business Worth? (Part 1 of 2)
(Part 1 of 2)
There are many ways to value a company, the final value would very much a negotiated amount between he Buyer and the Seller.
Business valuation is
* a process and a set of procedures used to estimate the economic value of an owner’s interest in a business.
* Valuation is used by financial market participants to determine the price they are willing to pay or receive to affect a sale of a business.
* In addition to estimating the selling price of a business, the same valuation tools are often used by business appraisers to :
— resolve disputes related to estate and gift taxation,
— divorce litigation,
— allocate business purchase price among business assets,
— establish a formula for estimating the value of partners’ ownership interest for buy-sell agreements, and
— many other business and legal purposes such as in shareholders deadlock, divorce litigation and estate contest.
* In some cases, the court would appoint a forensic accountant as the joint expert doing the business valuation.
Valuation Approaches
These approaches can be summarized into four (4) business valuation methods. They are :
1. Asset-Based Business Valuations can be done on a going concern or on a liquidation basis.
* A going concern asset-based approach lists the business’s net balance sheet value of its assets and subtracts the value of its liabilities.
* A liquidation asset-based approachdetermines the net cash that would be received if all assets were sold and liabilities paid off.
Note :
Using the asset-based approach to value a sole proprietorship is more difficult.
In a corporation, all assets are owned by the company and would normally be included in a sale of the business.
Assets in a sole proprietorship exist in the name of the owner and separating assets from business and personal use can be difficult.
For instance, a sole proprietor in a lawn care business may use various pieces of lawn care equipment for both business and personal use.
A potential purchaser of the business would need to sort out which assets the owner intends to sell as part of the business.
( look out for Business Valuation Methods Part 2 of 2 )
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