Comprehensive Financial Solutions, Inc.

440-343-4223

Estate Read Time: 3 min

What is the Value of Your Business?

In the second quarter of 2021, more than 2,000 small businesses were sold. The median sale price was roughly $320,000, up 12% from the same time last year.1

As a business owner, ascertaining the value of your business is important for a variety of reasons, including business succession, estate tax estimates, or qualifying for a loan.

There are a number of valuation techniques, ranging from the simple to the very complex. Outlined below are three different approaches to valuing a business.

  1. Asset Based: Calculates the value of all tangible and intangible assets held by the business. This approach ignores the future earning potential of the company. Thus, a pure asset-based valuation model is often used for companies that are bankrupt or looking to liquidate.
  2. Earnings Based: Seeks to arrive at a business’ value by applying a multiple to normalized earnings, i.e., earnings adjusted to subtract owner’s compensation and related expenses. The multiplier can vary substantially, depending upon the industry and the outlook for the business.
  3. Market Based: Compares the business to recent sales of similar companies.

Business valuation is not just a formulaic exercise. For instance, there is a value to the business of being a “going concern” as opposed to the start-up alternative. Ownership percentage will also matter; purchasing a minority share that has limited control may result in a discount to the actual value. The prospects for the business can impact its value. A greater premium will likely apply to a company engaged in a leading-edge technology than it would to one involved in a mature market.

Valuing a small business is not an exact science. Some aspects of the valuation may be debatable (e.g., the remaining life expectancy of a machine), while other aspects may be positively subjective (e.g., the value of the company’s reputation).

Willing Seller & Buyer

The true value of anything can only be determined when a willing seller and a willing buyer agree on a price of exchange. As a consequence, any valuation exercise may yield only a rough estimate.

Before moving forward with a business valuation, consider working with legal and tax professionals who are familiar with the process. Also, a qualified business appraiser may be able to offer some valuable insight.

1. BizBuySell.com, 2021

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright FMG Suite.

Share |
 

Related Content

Put Your Child on the Path to a Stronger Financial Future

Put Your Child on the Path to a Stronger Financial Future

Many parents consider financial goals to benefit their children at major milestones, whether it’s the appearance of a first..

Vacation Without the Guilt Trip

Vacation Without the Guilt Trip

Travel doesn’t have to be a financial headache.

Ask a Financial Professional: Successful Entrepreneurs

Ask a Financial Professional: Successful Entrepreneurs

Learn more about business finance from Travis Scribner of WestPac.

 

Have A Question About This Topic?







Thank you! Oops!

The A, B, C, & D of Medicare

Learn about all the parts of Medicare with this informative and enjoyable article.

A Cheat Sheet for Sending Your Kid to College

Dropping off your son or daughter is loaded with emotions; here are a few tips for a smoother experience.

Countdown to College

Preparing for college means setting goals, staying focused, and tackling a few key milestones along the way.

View all articles

How Compound Interest Works

Use this calculator to better see the potential impact of compound interest on an asset.

Impact of Taxes and Inflation

Estimate the potential impact taxes and inflation can have on the purchasing power of an investment.

What Is My Life Expectancy?

Estimate how many years you may need retirement assets or how long to provide income to a surviving spouse or children.

View all calculators

Long-Term-Care Protection Strategies

The chances of needing long-term care, its cost, and strategies for covering that cost.

Protecting Those Who Matter Most

The importance of life insurance, how it works, and how much coverage you need.

Investment Strategies for Retirement

Investment tools and strategies that can enable you to pursue your retirement goals.

View all presentations

What to Do When You Lose Your Wallet

Ever lost your wallet? Frustrating. Here’s what you can do to keep yourself safe.

Charitable Giving: Smart from the Heart

Do you have causes that you want to support with donations?

Investments

You’ve made investments your whole life. Work with us to help make the most of them.

View all videos