Running a business often requires understanding the value of the company from time to time. If you have not done a company valuation, it is recommended to do it as soon as possible. There are many reasons why a business owner or individual may need to understand business value. Here are some standard (typical) reasons, but this list is not intended to be “all-inclusive”:
• Enterprise seller
• A life-changing event occurs
• Set a general basis for value when no previous valuation has been done or when the existing valuation is outdated.
• Financing requirements
• Heritage considerations
• marital problems
• Determine if the business is growing, stagnating or declining
• Mergers, Acquisitions and Investors
Business valuation is a complex financial analysis. Business owners seeking Tier 3, low-cost business valuations may miss out on the important benefits of comprehensive analysis. There are several ways to determine the value of a company. In general, valuations may include the following methods or a combination of these methods:
• Income approach – based on the seller’s stable (normalized) disposable income.
• Market approach – sales of comparable businesses.
• Assets approach – the fair market value (FMV) of the transferred business assets.
The methodology used in this analysis is a multiple of seller (owner) discretionary income (SDE). SDEs allow potential buyers and sellers to better understand a business’ operating margins. Historical earnings indicate that the appropriate value of the goodwill of the business (going concern) is higher than the market value of tangible assets that may be transferred. The assumption here is that historical returns provide a conservative indication of future volume, predictability, and growth trends.
Business valuation has been called a “subjective science”. Everyone’s interpretation of value has its own definitions and considerations. There is no absolute – one way or right way – to determine the value of a business.
There is an old saying, “value is calculated, price is negotiated”.
If you are interested in learning more about business valuations, please call 207-373-8870 or contact Stephen C. Staples by email [email protected].