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From time to time you will need to place a dollar value on your business. If you are contemplating selling, refinancing or doing estate planning, a Business Valuation will be needed. We can help you when the time arises.
There are 3 basic methods of valuing a small business…
The Fair Market Value Method reflects the amount a willing buyer would pay a willing seller under reasonable conditions without distress. This method takes two approaches; one based on gross revenue of the business and one based on adjusted net income generated by the business. Based on prior sales and industry type a multiplier is applied to each of these factors over the past three years.
The Asset Value or Net Worth Method is based on the difference between the Assets and the Liabilities of the Corporation over the past three years. This method reflects the liquidation value of the business. If all assets were sold at book value and all liabilities paid, this would be the resulting amount of cash.
The Income Method reflects the ability of the company to generate income on its net assets. If all assets were converted to cash and invested at a given capitalization rate, what value would be placed on the company to achieve that rate of return. The issue with this method is the determination of the capitalization rate. A small business is a highly risky investment. A reasonable capitalization rate for a small, closely held business is considered to be between 30% and 35%. This valuation was based on a capitalization rate of 32%.
Depending on the situation and available information, a combination of the three methods is often used to arrive at a reasonable estimate of value.
