How much is it worth?
The question asked most frequently by buyers and sellers alike is “What is this business worth?” One definition suggests “fair market value” is “…the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.”
The truth is that the process of valuing a business is rarely that simple. There are a wide variety of motivations and factors that go into determining the actual selling price of any business. The practice of business valuation is hardly an exact science and can vary depending upon the type of business and the reasons for the valuation.
Business valuation should be used to determine a baseline or range from which buyers and sellers can negotiate a price that they can both agree upon.
New real estate agents are taught that there are three approaches to valuing real estate: comparables, replacement cost and capitalization of earnings. Business valuation is rarely that simple. Comparables are usually limited, replacement cost is inappropriate and capitalization of earnings does not tell the whole story. Earnings are not the only thing that value a business. It is possible for a company to have negative earnings and yet have great value because of its assets and potential.
In business appraising the valuation process involves comparing several different approaches and selecting the best method, or a combination of methods. Several of these approaches include:
- Asset – Based valuation;
- Capitalization of income;
- Cash flow or owners benefit;
- Multiplier or market valuation.