We Care About Our Business
If there is one thing in common among small, medium and large sized business owners it is; we dump a great deal of passion and energy into our respective business. Why? Because it’s ours and that is what it takes to start and grow a business of any size. Significant and selfless CARE is focused towards our employees, clients, revenue and more. However, have you ever taken a step back and asked yourself – What Is The Value Of My Business?
Why Value My Business
This is a subject for another article however the proper understanding and valuation of your business helps you create informed decisions around; future growth, RETIREMENT / SUCCESSION AND EXIT PLANNING, insurance needs like buy/sell agreements, trust / estate planning, protection of your assets and more.
How Do I Value My Business
Business valuation methods are generally categorized under three approaches: asset approach, income approach, and market approach. Since no single method is most appropriate for valuing every business, it’s common to reference a business valuation method under any one or all three approaches.
Asset Approach
- Typically used for businesses that have substantial tangible assets, usually in the form of inventory and equipment
- Appropriate for businesses with a substantial amount of fixed assets
- Adjusted book value – Generally represents the “liquidation” value – assets, with adjustments, less liabilities
Income Approach
- Uses prior earnings to estimate company value based on income potential
- Appropriate for businesses with consistently strong earnings. EXAMPLES:
- Capitalization of Earnings Method – Applicable for consulting-type businesses and/or those with few or no tangible assets.
- Excess of Earnings Method – Generally for manufacturing-based firms with significant assets.
- Discounted Cash Flow Method – Uses projected values. Projected future earnings are forecast, then discounted using an appropriate rate representative of the “next best investment opportunity” with a comparable level of risk. Used mainly for mergers and acquisitions.
- Multiple of Discretionary Earnings Method –
Applicable for more service-oriented firms, such as legal, accounting, healthcare systems, dental, engineering, etc. Goodwill of the owner(s) has a significant impact on value.
This article is designed to give you a high-level overview of methods to value your business. Valuing your business can be critical for future needs; both personal and business.
David Johnson | Founder, Fortis Life Group
David@FortisLifeGroup.com
