What is Business Valuation?

As the owner of your business, you no doubt know the inner workings of your business like the backs of your own hands. Indeed, your products and services, your customers, and the general day-to-day management and goals of your business are no doubt very familiar to you, and likely very close to your heart as well.

But do you know what your business is worth on the open market? Furthermore, do you know why understanding your business’ worth, even if you’re not planning on selling today, is important?

At Harvest Wealth Partners, we educate you about the importance of business valuation, the different business valuation methods available, and valuating your business for a competitive price.

The Importance of Business Valuation

Business valuation is the process of analyzing a business to determine the value of its assets, debts and liabilities, and overall worth. Business valuation is critical, as it helps a company to understand its role and place in its current market and industry, how to plan and strategize for the future, and what its options are should an emergency situation arise (i.e. the death of a shareholder, owner, market crash, etc.). What’s more, the United States Internal Revenue Services (IRS) will also need to know the value of a business in order to determine things like estate taxes and tax basis for a future sale.

Business Valuation Methods

There are three different valuation methods that are commonly used. These are:

• Earnings value approach. Also called the income approach, this method of valuating a business focuses on the reason that the business is in operation in the first place: making money. There are two ways to tackle the earnings value approach: discounted future earnings method or capitalized past earnings. Discounted future earnings rely on the average of predicted future earnings, and then divides this amount by the capitalization factor (the discount rate of expected return based on the risk of the business). The capitalized past earnings method, on the other hand, looks at the expected level of income for the future based on the company’s past earnings, and then multiplies this number by the capitalization factor.
• Assets-based approach. The asset-based approach is fairly simple – essentially, this is the process of adding up all of the business’ assets, and then subtracting any of the business’ liabilities.
• Market value approach. The market value approach can be a more complicated way of valuating a business, as this method relies on assessing the values of other businesses in the area similar to yours. For example, a coffee shop business’ value may be determined by looking at the past five years’ worth of coffee shop sales within a 50 miles radius, and seeing how much each shop sold for and the similarities and differences of those businesses compared to the current coffee shop that is being valuated. This method doesn’t always work, as there may not be enough market turnover (sales and purchases) of similar business.

Contact Us Today to Learn About the Importance of Business Valuation

At Harvest Wealth Partners, we believe that understanding the value of your business is an important tool to have as you plan for your business’ future. To learn more about business valuation, please contact us today.

*This page is provided for educational purposes only and is not intended to provide legal or tax advice. For legal or tax advice, please consult a qualified tax or legal advisor. Harvest Wealth Partners and LPL Financial do not provide business valuation services.