A Business Valuation is a process to manage a company’s financial value, which could help several situations. For example:
- You may require to sell the business due to retirement, strength, divorce, or family reasons.
- You may need debt or equity funding for development or due to money flow problems, in which possible case investors will want to see that the business has enough worth.
- You may be adding stockholders (or one or more shareholders may ask for a buyout). In this instance, the share value will require to be prepared.
Whatever the reason, doing a business valuation will help you establish a fair value for the business’s sale.
Now let’s move on to our main topic, Top 3 Company Valuation Methods, which will increase your business value.
Top 3 Business Valuation Methods
When deciding the value of a business, there are three ways to estimate worth:
- Asset-based approaches
- Earning value approaches
- Market value approaches
Every program has its considerations, and if you have a sole proprietorship, there are more factors to consider.
Asset-Based Approaches
Nearly an asset-based business valuation will figure up all the investments in the company. You can do Asset-based business valuations in one of two ways:
- A going concern asset-based approach studies at the company’s balance sheet records its total assets and subtracts its total liabilities. It is also called book value.
- A liquidation asset-based approach manages the liquidation worth or the net cash that would be taken if you sold all assets and liabilities paid off.
Earning Value Approaches
An earning value approach depends on the opinion that a business’s value rests in its capacity to create wealth in the future.
- Capitalizing Past earnings:
limits an assumed level of cash flow for the business using a company’s history of past payments normalizes them for new revenue or expenses and multiplies the expected normalized cash flows by a capitalization factor. The capitalization factor reflects what rate of return a reasonable purchaser would expect on the investment and a measure of the risk that the expected profits will not be achieved.
- Discounted Future Earnings:
is another earning sense approach to valuation. Instead of an average of past profits, the prophesied future earnings trend is used and divided by the capitalization factor.
Market Value Approach
Market value approaches to company valuation effort to build your business’s value by comparing your company to related ones recently sold. The idea is related to using real estate comps, or comparables, to value a house. This process only works well if there are enough similar businesses to compare.
What About Franchise Businesses?
Franchise contracts usually define how you can sell a franchise, and these vary by franchise merchant, so check your franchise agreement. Some contracts specify that the franchisors will buy back your franchise directly for a fixed price. Others assist with cost and find a buyer, as it is in their best interest to guarantee that the business is unbroken.
