Whether you’re intending on selling your business, purchasing another or whether you’re currently a business owner, a business valuation is the first step to determining the value you’ve created. GuideSpring Wealth Strategies is here to help with that process.
Preparing for a business evaluation is not complicated at all but rather easy. This guide will help you prepare by exploring valuation options and the additional steps required to receive an accurate price.
Choosing An Evaluation Method
There are five business valuation methods available to small business owners. These methods include:1
- Adjusted net asset
- Capitalization of cash flow
- Discounted cash flow
- Market-based valuation
- Seller’s discretionary earnings
Adjusted Net Asset
The adjusted net asset is determined by subtracting liabilities from assets while using industry knowledge to adjust both metrics for current value. For example, an asset or liability may be priced lower than its original value due to market fluctuations, therefore adjusting the overall value of the business.
Capitalization of Cash Flow
This is determined by dividing your cash flow from your business’s rate of return. Cash flow is an amount of money that entered and exited your business within a given time.2 Your rate of return, or capitalization rate, is the earnings a buyer can expect to receive.
Discounted Cash Flow
Discounted cash flow refers to a complex process used to calculate the value of a business based on its potential growth, by discounting projected cash flows to arrive at a net present value.
Using this method, similar businesses that have been recently sold are examined to determine the value of your business.
Seller’s Discretionary Earnings
This valuation method is typically only performed on small businesses. It is calculated by subtracting long-term business costs from pre-tax and pre-interest earnings to determine how much money a business makes.
Establishing a Valuation Plan
Whether you know which valuation method you want to use or not, determining a plan can make the process smoother. GuideSpring Wealth Strategies is a seasoned advisor when it comes to providing clients with accurate business valuations. Some valuations can be performed on your own. However, for business owners seeking more complex methods, our professional services may be utilized.
Calculating Intangible Assets
Up to this point, certain documents and assets could be considered tangible, or physical, assets.3 For example, an office could be considered a tangible asset. We often think of tangible assets first when considering business value, though intangible assets should not be forgotten.
According to the Corporate Finance Institute, intangible assets are non-monetary, identifiable and abstract benefits.4 As an example, an email list of clients could be considered an intangible asset. It is beneficial because it contains the contact information for current and potential clients, possibly leading to more revenue. But, it’s not a physical object and does not hold a determined price.
Other intangible assets could include employee satisfaction or high SEO rankings; think of these assets as unquantifiable benefits.1
Being able to have a business strategy in place so you can spend your retirement years with the people you love, doing the things you love is something we take great pride in.
To schedule a meeting with GuideSpring use the link below to discuss a potential business valuation or consult on your current tax situation.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.