Operating a business normally requires knowing the company’s value from time to time. If you have not done the company valuation as of yet, it is advisable to have it done soon. There are many reasons why a business owner or individual may need to know the value of a business. Following are some standard (typical) reasons, however this list is not intended to be ‘all inclusive’:
• Seller of a business
• Buyer
• Occurrence of a life changing event
• To set a general basis of value when no valuation has been previously performed, or existing valuation is outdated.
• Retirement
• Financing requirements
• Estate considerations
• Marital issues
• Litigation
• Bankruptcy
• To determine if the business is growing, stagnant, or declining
• Mergers, Acquisitions, and Investors
A business valuation is a complex financial analysis. Business owners that seek a tertiary, low cost business valuation may be missing out on important benefits of a comprehensive analysis. There are several approaches in determining a company’s value. In very general terms, valuations may include the following, or a combination of these methods:
• Income Approach – Based on a sellers stabilized (normalized) discretionary income.
• Market Approach – Sales of comparable businesses.
• Asset Approach – Fair market value (FMV) of business assets being conveyed.
The methodology used in this analysis is a multiple of seller’s (owner) discretionary earnings (SDE). SDE provides a better idea of the business’ operational profit for a prospective buyer, as well as the seller. Historical earnings indicate an appropriate value for the goodwill of a business (going-concern) over and above the the market value of tangible assets that may be conveyed. The assumption here is that historical earnings provide a conservative indication of the amount, predictability, and growth trend in the future.
Business valuation has been referred to as a ‘ subjective science’. Each individual has their own definition and considerations as to the interpretation of value. There is no absolute —one way or right way — to establish what a business is worth.
There is an old saying , “value is calculated, price is negotiated”.
If you’re interested in learning more about business valuations, contact Stephen C. Staples at 207-373-8870 or via email scstaples127@yahoo.com.
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