Startup Resources on Business Valuation: Buying or Selling

By Fernando Berrocal




The process of determining how much your business is worth is known as "Business Valuation" and it has to do with fair market value. Three approaches are used: asset-based, market value, and earnings value.


Reasons to Value a Business: There are several reasons why you should know the value of your business. The approaches listed give accurate information:


  • Your small business is being sold to a third party.
  • Knowing the worth of the business may help identify its strengths and shortcomings.
  • When you're attempting to raise money, this can help.
  • For a Small Business Administration (SBA) loan.


How to Determine a Business's Worth: Business owners may want assistance. Find a business valuator or broker who is familiar with business valuation methodologies. When it comes to selling a business, you'll need to have some of the following items:


  • An intent letter. This agreement outlines the transaction conditions.
  • A purchasing contract. This binds the buyer to purchase for the agreed-upon price.
  • With the letter of intent, the buyer's due diligence must be provided.


It's important to be aware of all applicable state and local legislation. Some of these may include experimenting with various permission options. To get an estimate of how much your business is worth, consider using a business valuation calculator.


Collect your Financial Documents:  Financial records will play a factor in determining the worth of your company. Your business will have to create a list that contains:


  • Profit and loss statements for the last three years are available.
  • Contracts with distributors and suppliers.
  • A Current Balance Sheet.
  • Cash Flow Statements are a type of financial statement that shows how much money is coming
  • Two or three years' worth of tax returns.


Make a list of all your Intangible Assets: The non-physical assets that a business manages are known as "Intangible Assets". Regardless, they provide value to any business. Trademarks and patents, as well as copyrights and brand value. 


Other intangible assets that must be included in a business valuation:


  • Goodwill. One of the most frequent categories of intangible assets is intellectual property.
  • Technology that has been patented. Databases and computer software are examples.
  • Copyrights. This is dependent on the type of business being sold.
  • Various agreements and contracts. Like license agreements and broadcasting permissions.


Collect Other Essential Documents: Here are some other essential documents to determine a business’s value.



You can evaluate the value of your business once you've gathered all of this information. In some circumstances, additional documentation must be submitted.


Methods of Business Valuation: It's not always easy to figure out how much your business is worth. A value can be calculated in a variety of ways. A few techniques of valuation are listed:



Business Valuation

 

  • The Adjusted Net Asset Method: This is a method of calculating the value of an organization's profits. To arrive at a fair market value, it examines the obligations and assets. Both intangible and physical assets are included.


  • The Earnings Multiplier Method:  This method of business valuation determines a value by examining a small business' revenues. For any year or number of years, it doubles the money.


  • The Earnings Capitalization Method: Based on current earnings and expected future performance, it determines the value of projected profits. This strategy, which is part of the income approach concept, may be used by businesses.


  • Method of Discounted Cash Flows (DCF): The DCF examines a business's expected cash flows. It operates by calculating the value of a company or project in this way.


How to Value a Small Business: There are different ways to arrive at the value of a business. If you are looking to place your business for sale, the ones we described above can help. The right valuation method can depend on different factors:


  • Assets after debt. This is a simple market approach to determine the worth of a business.
  • The Seller's Discretionary Earnings (SDE) is another way to determine a business’s value. This is great for service companies.
  • The market comparison. Simply compare what sells in their industry and location.


What Is the Cost of a Small Business Valuation?  For a business valuation, there is a price range. It ranges in price from $2000 to $30,000. A good value is determined by some criteria, these include:


  • The kind of records that are on offer. Examples are Geolocation Data and Paper Records.
  • The Industry. Some businesses have a higher liquidation value and have more market data than others. 
  • When determining a firm's worth, its size is important, for larger organizations, more research is required.




Business Valuation

 

When Buying or Selling a business, Know How to value Goodwill:


The most popular way is to calculate the fair market value of the tangible assets of small businesses. Subtract it from the total value of the business. The supplier list and a customer base are examples of qualities that contribute to goodwill. Patents, trademarks, and copyrights are all covered, as well as permissions and licenses.


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