Whether you are looking to buy or sell your business, you will need a professional business valuation.  Unfortunately business valuation methods are a dime a dozen and as all businesses are unique, it is vital to use the correct formula for your business to reach a reasonable market value.

As a business owner, there are many pitfalls when trying to calculate a fair value for your business, especially when many business owners look at the value from a purely emotional perspective. Having placed years of their time and effort into the business, their judgement is understandably clouded which results in businesses being marketed for unrealistic prices. More often than not, this deters buyers, keeps the business on the market for too long and may attach a stigma to the business as being a non-seller.

It is therefore imperative that a business’s value is based on hard facts such as a business’s ability to generate a consistent cash flow. Only then can a fair value be calculated to act as a foundation on which buyers and sellers can negotiate.

Business Valuation Methods

There are a number of common valuations methods which can be applied to different businesses namely:

• Capitalisation of income valuation: This valuation method works best for companies with few assets such as service companies.
• Asset valuation: This is a business valuation method that works best for companies that are asset-rich such as businesses in the manufacturing and retail sectors. This takes into account figures like Fair Market Value, Leasehold Improvements, Owner Benefit and Inventory to determine the market value.
• Market Valuation: This is an estimation of the businesses value based on what similar businesses have sold for recently.
• Owner Benefit Valuation: This method uses a fairly simple formula to determine the business’s value and is good for businesses whose value is estimated by their ability to generate cash flow.