Methods For Valuing A Business: Part 1 – Understanding the Asset Based Valuation
Although there are many different ways of valuing a privately-owned and closely-held business, there are only two basic approaches that are the basis for all traditional valuation procedures: the valuation of assets and the return on investment. These further break down into four fundamental methods. Each method is important for estimating the value of your business, depending upon the type of sale that you plan to use.
The 4 Methods:
- Asset based valuation (liquidation value)
- Market comparison valuation
- Present value of the business’s future earnings valuation
- Capitalization of current net earnings valuation
Using an Asset Based Valuation
Today, we will discuss the asset based valuation method for valuing you’re business. This type of valuation is also known as the liquidation value and is relatively easy to determine. The assumption in this valuation method is that you will not sell your business as a going operation, but instead you will sell all of the assets separately, pay all the outstanding bills, and keep whatever is left over. This is usually an unreliable method for arriving at a good estimate of a business value if the company has net operating income as it does not take into consideration the value of the business as a “going concern.”
Although the tangible assets (ones you can see, touch, feel, count or measure) can be appraised as to their current market value, it’s very difficult to assign a meaningful value to the intangible assets (things that exist more in perception than in physical space) such as goodwill, trademark, or trade name. In fact, the intangible assets usually have little of no value outside of the company. However, as the business owner, you should do an asset based valuation to have as a reference to measure against the other valuations. You may discover that there is more value in your business if you separate out the tangible assets for sale than if you sell the business as a whole.Methods for valuing a business: Part 1 - Understanding the Asset Based Valuation Click To Tweet
We will continue looking at the other valuation methods in future posts, but in the meantime, if you’d like to read more about valuations, I encourage you to read “Business Valuation … How it Works” or “8 Reasons for Valuing a Business.”
About Lisa Sharp – Based out of Pensacola, Florida, 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.