How Is A Business Valued?

There are a number of reasons why you may need to get the value of your business. The most obvious is where you are looking to sell your business or buy someone else’s. Legal business separation, shareholder buyouts, or personal events like a divorce may require that a business be valued.

Valuing or Appraising Businesses

How are businesses appraised? Like any appraisal, everyone has slightly different methods of doing it and a number of different experts can look at a business and come up with different opinions.

One thing that makes valuing businesses so difficult is that valuation isn’t just an analysis of current value—for example, counting up what you own and comparing it to what you owe. Rather, valuation can also include projection of your business’ activities that may happen in the past, such as projecting future sales (which are largely dependent on and based on past sales histories).

Valuation Methods

Often, companies are measured or valued based on market capitalization. This is simply multiplying share prices by the number of shares that there are. However, while this is fine for larger companies that are publicly traded, it may not be as useful to the everyday moderately sized business.

Another way of valuing a business is taking what revenues the company generated over a period of time and projecting that figure out to the future by using a multiplier. The multipliers will depend on external factors.

For example, a business that seems to have been increasing in revenue and which is in a field that is expected to expand may get a positive multiplier. A business that has been faltering or which is in an area that is contracting may get a negative multiplier.

As you can see, this method is highly subjective—the multiplier and the external factors are all dependent on the experts’ opinions and projections.

Just like you can multiply revenue, you can also value a business by multiplying actual profit, which many consider to be a more accurate measure of a business’ value. Other methods, such as what is known as discounted cash flow, also can take into account factors like inflation to value the business.

Business can also be valued in the same way that you would value anything else that you own—what would you get if you sold it? In business terms, this is called liquidation value.

Getting an Expert to Help

There is almost no end to the number of ways that a business can be valued and many methods are hybrids of the methods described here. This is why if you have a business law case that in any way involves needing to value your business you should be aware of the necessity of finding a lawyer that understands how to work with business valuation experts.

Call the West Palm Beach employment law attorneys at Pike & Lustig today for help in your business law case.

Resource:

nerdwallet.com/article/small-business/how-to-value-a-small-business