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Multiple Methods to Value a Business
Many attempts have been made by appraisers, brokers, accountants, lawyers, and business writers to standardize the methods of valuing a business, but a significant diversity in approach still prevails. Many specialists, and various learned authorities, will try to sell you workbooks, computer software, and lately, interactive CD-ROMs to help in the valuing process. Almost every one of these products are different, except in its approach to valuing your business in terms of either net assets or some form of return on investment.
Reasons for Valuing a Business
The process of valuing a business will always remain more of an art than a science. That is why there are different reasons to value a business other than to estimate what the selling price will be on the open market. These reasons include:
- Selling or acquiring a partial interest in a business
- Forming a joint venture arrangement with another company
- Selling or acquiring a product or service line
- Putting together a buy/sell agreement for a partner or minority shareholder
- Dissolving a partnership or corporation
- Reorganizing a company under the bankruptcy rules
- Establishing an estate plan and determining value for estate and gift taxes
- Divorce settlements
In all of these cases, it’s difficult to choose a valuation method since the force of a free and open market are generally not in effect when arriving at a fair market price. Although the valuation process occurs in the sale of a business to a stranger, no actual free-market sale takes place in the above situations. Only estimates, perceptions, and someone’s arbitrary valuation will ultimately prevail. So for these cases, the method used for valuation will be different than the method used for valuing a business for sale as an arms-length transaction.
To read more about the business valuation process, I recommend reading my previous post Business Valuation … How it works.
About Lisa Sharp – Lisa has worked in commercial real estate since 2000 and specializes in business brokerage and commercial sales and leasing. Her experience as an owner and operator, of multiple businesses, makes her especially qualified to help clients purchase and sell businesses. Click here to read her full bio, or if you would like to contact her, you can call her at 850-434-7500, or email her at [email protected] You can follow her on Twitter at @lsharpsvn.
Photo Credit: “Money From Smart Phone,illustration” by tungphoto Photo Credit: freedigitalphotos.net