Business Owners Ask – How to Evaluate the Value of an Existing Business

Andy Anderson

While the U.S. economy continues to sputter, it is difficult for business owners to know how to evaluate the value of an existing business.  There are three basic approaches that can be followed when valuing a business, so it’s important to choose the right one for your industry. 

Asset Based Approach: An asset-based approach is where the value is derived from the costs of tangible assets, or the replacement value of such assets in similar condition.  This approach is best used when the earnings of the business won’t support a greater value than its tangible assets. 

Market Based Approach: A market approach to business valuation is based on certain factors, or rations, derived from the actual earnings, assets and/or sales of similar businesses.  When these ratios are applied to a company’s assets, earnings and sales, a business valuator can get a good indication of its “market-based value”. Another market-based approach is known as “rules of thumb”, but it this approach is less specific in how it determines the conversion ratios, and more likely to use averages instead of actual calculations. 

Income Based Approach: One of the more common ways to evaluate the value of an existing business is the income approach.  Here, the earnings of a business are calculated, using a multiple, a capitalization rate, or a discount.  Appraisers typically use five common ways to value a business using the income approach.  Each of these requires the business to have at least some level of earnings on which to base the calculation.  The key here is to properly match the correct conversion factor with the selected level of earnings. 

As any business broker will tell you, properly valuing your business is a key aspect of a successful sale.  While it may seem complicated to the untrained eye, a qualified business valuator can simplify the process considerably. 

Are you ready to list your business for sale and move onto a different chapter in life? To expedite the sale of your business, post a listing on BizSale.com and enlist the help of a business broker to help you evaluate the value of your existing business.

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