Understanding Business Valuation Before Selling a Business

After many years of operating your business and tracking bank statements, you probably think you know its value. However, no matter how savvy you may be as a business owner, you need to hire a business valuation consultant before you sell your business. While you can measure the hard assets on your own, a valuation expert understands the intangible assets, like the value of your patents, workforce, procedures, and customer lists. So, before you sell your business, hire a business valuation professional who can help you learn about the proper methods. 

Using a Skilled Business Valuation Consultant

Qualified valuation experts will assess the value of your business for a fixed fee. This amount depends on how complex the engagement will be. Ask about the certification of the valuation professional to make sure they have the right experience. Also, know how long the expert has been doing business valuations. They should be doing it regularly to make sure they are up-to-date on valuation methods and approaches. 

Starting the Valuation Early

Nothing is wrong with getting a valuation of your business early. Often, your business is your most substantial financial asset. Understanding the value of this asset is vital to business planning. A valuation professional can identify the possible disconnect between what you believe your business is worth and its true market value. This lets you plan accordingly for both estate planning and retirement. The expert can update their valuation later. If your expectations and the findings of the expert do not match, you may want time to adapt, particularly if you need the business for helping fund your retirement. When you hire a valuation expert to do yearly valuations, you can track the value of your business over time. 

Valuation Methods Experts Use

Business valuations are performed using the following methods:

  • Asset approach. With this approach, the value of a business is determined based on the value of its tangible assets, such as inventory, receivables, real estate, equipment, and machinery, minus liabilities. But a company that has significant assets can end up being undervalued with this approach.
  • Market approach. In this approach, a company is valued by applying a company’s market data. Often, market data include valuation multiples like price-to-earnings multiple for companies publicly traded in the same industry as the subject company. 
  • Income approach. This approach helps determine ROI because it depends on the anticipated net cash flow. 

A valuation expert will take into account these methods as they obtain the value of your company. However, they may not use all of them. 

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