Selling a business at its full value is a primary goal for most owners. Despite this, less than 40% had a formal valuation in the last 3 years.
There’s a wide range of business valuation methods to choose from. They’re not all suited to every type of business. It’s important to choose the right one for your needs to get the necessary data.
You must also keep in mind that valuations aren’t the only option for determining value. A business appraisal may also be an effective method.
Read on to learn the difference between a valuation and an appraisal and how to use them to get an accurate market value for your business.
Business Valuation vs. Business Appraisal
Valuations and appraisals can help you determine an accurate market value. Doing so makes it easier to navigate major business changes such as sales, investments, and stocks.
Business size is not a factor in either method. It’s possible to perform a small business appraisal and/or valuation. Major corporations can use either method as well to get a fair market value.
Despite the similarities, the two processes are not interchangeable. The main differences between a business valuation and appraisal are the person completing the process and the elements they consider.
Almost anyone can complete a business valuation, but only a licensed financial professional can complete an appraisal. They know how to appraise a business accurately and effectively.
A business valuation considers more elements than an appraisal, some of which are difficult to quantify.
Appraisals combine the components of all the major business valuation methods. They consider market value, business assets, financial history, and more.
Knowing the difference between these methods helps you choose which one is best for you, who should perform it, and what methods they should use. Check here to learn more about how to compare a business valuation vs appraisal.
Business Valuation Methods
Once you know how to calculate business valuation, you can either perform the process yourself or hire a professional. Doing either requires choosing the best method to get the results your business needs.
The three main ways to determine value are the asset, market, and income approaches. Knowing the differences between them helps you choose the best one.
Asset Approach
Also known as the liquidation approach, this method looks at every component of the business. Each one is referred to as an asset. The combined value of all of them is used to determine the value of the business itself.
There are two primary ways to perform an asset-based business valuation. They’re known as going concern and liquidation value.
The difference between the two methods is whether or not the business being sold is considering liquidation. If it isn’t, going concern can take its equity into account. If it is, liquidation value considers the value of all liquidated assets.
Assets can be either tangible things like property or intangible things like patents. The asset approach must consider both.
Market Approach
This method compares a business to similar ones in its industry that have already sold. It involves using valuation formulas to determine market value.
The market approach tends to only work when there are plenty of other similar businesses in the market. Sole proprietorships and niche sellers may not benefit much from it because there’s nothing o compare them to.
It’s best to have a professional prefer a market-based business valuation or at least someone who fully understands current market conditions. They can do a proper comparison that provides an accurate market value.
Income Approach
This method carefully analyzes all of a business’s financials. These include taxes, earnings, stocks, and more.
Once the financials are all tallied up, they’re compared to the current market rates of return. This is used to determine market value.
The income approach is another method that’s best performed by a professional who understands the current economic landscape and how to read financial records. Otherwise, you risk receiving inaccurate data and an unfair market value.
There are other methods to consider as well, but they tend to fit into one of the three aforementioned categories. Choosing the best one for your business needs can help you get the most accurate market value.
How to Determine the Value of Your Business
There are several business valuation methods to choose from and professionals who’ll offer to perform them for you. Choose carefully to ensure you get the most accurate data to determine a fair market value for your business.
When deciding what method to use, consider what type of business you run. What do you sell, what do you own, and what information can you provide?
If several other businesses similar have sold recently, consider the market approach. If your financial records show how you perform, consider the income approach. If the heart of your business what it owns, consider the asset method.
Keep in mind that you don’t have to choose a single business valuation method. Combining more than one can provide a more accurate result. For instance, you could consider both assets and income to show how much your business is worth.
Once you’ve chosen a method, you must also decide who will perform your business valuation. This is another important part of the process, as choosing the wrong person will give you an inaccurate result.
If you want to perform the process yourself, consider if you can be objective about the value of your business. Owners invest up to 80-90% of their wealth in their businesses, making it difficult to consider their value from an outsider’s viewpoint.
If you decide to hire a professional, do your research before making a decision. Look into factors such as price and qualifications to get the best results.
Where to Learn More
Determining the value of your business lets you make smart decisions when selling, investing, or partnering with others. The two main methods of doing so are an appraisal or a valuation.
Knowing the major business valuation methods available to you lets you choose the best one for your needs. The three main types are asset, market, and income.
Before performing the process, choose the right method based on the characteristics and needs of your business. Also, be sure to hire the best possible professional and remain objective if you perform the process yourself.
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