It can be hard to know what a business is worth. One thing you need to consider when pricing your own company for sale or purchase, and it’s something many people forget about: historic cash flow versus profitability – these are just some of the factors that go into valuing an asset like yours.
The three most common business valuation methods are the asset method, income approach or market-based:
Asset Method:
This is the simplest way to calculate a business’s worth. The difference between assets and liabilities gives you an idea of what percentage each party holds in terms of value, which can then be used as input when determining profit/loss statements or other financial data like revenue growth rates for example.
A company with $100K in assets but only 20k liabilities may have their net profits calculated at 80%. A profitable going concern would use another calculation method though – so this one isn’t always accurate on its own!
Income Method:
It can be a bit tricky to understand, but the income method is especially popular for financial wizards and professors who love teaching theory. It’s not easy for most small business owners because they have to calculate their own future economic benefits (forecasts), adjust those numbers based on growth rates or taxes -you get the picture-and then discount them into a present value with different interest rate structures in mind as well.
Market Method:
The market method is a simple, quick and easy way to get an idea of the value your business would be worth. You can use this information when selling or buying another company through leveraging its comparable companies in size, revenue, etc.
The key point about using The Market Method as part of our process will help us understand what price range we should shoot for based on these figures so that you know where all potential buyers are at.
Finding out what a business is worth can be difficult. One thing you need to consider when pricing your own company for sale or purchase, and it’s something many people forget about: historic cash flow versus profitability – these are just some of the factors that go into valuing an asset like yours.
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Author Profile
- Along with leading the team, Millard also works alongside different Fortune500 companies as their management Consultant/Financial Analyst, which shows his passion in helping other businesses grow.
