Putting a price on an existing business can be difficult when the company is privately held. While a public corporation can establish its value by analyzing what investors are paying for its stock on the open market, a private business does not have this luxury. Since private businesses do not typically publish sales information, it may also be hard to find information on other businesses of the same type that have sold recently as a basis for comparison.
Worth What a Buyer Is Willing to Pay
Any valuation of a small business is just an estimate until the business actually sells. You may think your business is worth a lot of money. In reality, it is only worth what someone is willing to pay for it at the time you need to sell.
Business Valuations Benefit from Expert Analysis
Since the valuation of a business is an estimate, experts are typically hired to help determine a fair sales price. Lawyers, accountants, appraisers, and other experts can be involved in valuing a business. These professionals review your company's financial records, sales history, assets, liabilities, competition, and market position. They bring their professional opinions to bear on the value of the company's future prospects.
Economic Models Help Determine a Valuation
Business valuation experts use economic models to estimate a company's worth. The value of a business can be very different, depending upon the economic context applied to the company's current and future prospects. Generally, there are four economic models used to value a business. Asset analysis values the business based upon the sales price of its assets. Cash flow analysis values the business based on its current income stream. Earnings analysis values the company based on its profitability. Discounted future earnings analysis values the business based on an estimated value of its potential future earnings.
Business Valuations Can Involve Intangibles
Many business owners feel that their businesses are worth more than the numbers on a piece of paper. There is customer loyalty to consider and brand recognition. Some businesses have valuable intellectual property, such as a prime website address or the rights to a very recognizable product name. Other businesses have a prime retail location or have cornered the market. These intangibles should figure into the value of your business. Valuable intangibles can be a basis for establishing a positive valuation for a business even if it is losing money.
A Business Lawyer Can Help
The law surrounding the valuation of a business is complicated. Plus, the facts of each case are unique. This article provides a brief, general introduction to the topic. For more detailed, specific information, please contact a business lawyer.