Business Valuation 

Group meeting 

Business valuation helps owners:

  • Determine the approximate value of marketable assets in the event the business is liquidated.
  • Establish an approximate value of each owner’s interest for personal planning purposes if the business is to be retained for the owner or the owner’s survivors.
  • Determine the approximate value of each owner’s interest if the business interest is to be sold.

Some Types of Business Valuation Methods

The Appraisal Business Valuation Method
Appraisals are professional assessments done to determine the approximate value of a business. Appraisals are performed by professionals who specialize in the valuation of businesses. A financial representative can refer you to several professionals who may be able to help you with your business appraisal. They use financial information and a variety of other factors to determine the value of a business.

  • Get a copy of the appraisal so you can use the value shown.
  • Make sure the appraisal is recent. If the appraisal is more than two years old it probably doesn’t affect the current value of the business.

Owner’s Estimate
Some business owners have an idea of what their businesses are worth. While an owner’s estimate is the least scientific business valuation method you should consider it because many owners do understand the marketplace for similar businesses.

Adjusted Book Value
Adjusted book value is another valuation method for determining the value of a business. It is derived from the balance sheet, which lists the assets and liabilities of a company at a point in time (for example, at the close of a quarter of the fiscal year).

The balance sheet shows the net worth, or book value, of the business which is the difference between the assets and liabilities. This figure is also called owner’s equity, because it represents the portion of the value to which owners, rather than creditors, have claim.

Capitalization of Income
The capitalization of income business valuation method accounts for future income potential along with other factors that affect the worth of a business.

Capitalization of Income values a business by multiplying income by a multiplier or capitalization rate.

Advantages/Disadvantages of Business Valuation Methods

Method Advantages Disadvantages
Appraisal Business Valuation
  • Performed by professional appraisers who specialize in business valuations.
  • Involves a more complete analysis of pertinent factors than other methods.
  • A professional appraisal can be expensive.
Owner’s Estimate Business Valuation
  • An owner usually understands the marketplace for similar businesses.
  • An owner knows how much he/she would pay for a similar business.
  • Owner’s estimate is the least scientific method for valuing a business.
Adjusted Book Value Business Valuation
  • Accounts for the fair market value of assets, which often differs from the booked value.
  • Does not account for future income potential of the business.
Capitalization of Income Business Valuation
  • Accounts for future income potential of the business.
  • Considers after-tax income for the last three years.
  • Adjusts income for unusually high or low owner’s salaries.
  • Considers a variety of factors in computing the multiplier.
  • Accuracy of multiplier only as good as the information provided by owner.

    For example, an overzealous owner can paint a picture of the business that causes the value to be higher than it should be.

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