What Gives A Business Its Value

You might think that business owners are constantly monitoring the value of their businesses. On the outside looking in, a business value seems to be among the most important aspects of running a business. While this is true to some degree, the truth is that the day-to-day operations of owning and operating a business often leave little room to consider much else.

In the highly competitive world of business, small businesses in particular often leave thinking about and analyzing their value on the back burner. It’s true that the value of a business isn’t always need-to-know information, and it certainly isn’t of vital importance to a business’s customers.

There are times in the lifespan of a business, however, when being able to assign and understand its value is crucially important. Too often, business owners neglect thinking about value until it is needed — in the event of selling the business or applying for a loan, for example. These business owners are then left scrambling to come up with a value, a mindset that rarely lends itself to quality, thoughtful work.

Business owners should instead take a more deliberate approach, possibly by working with a Zanesville business valuation expert, to determine value.

The first thing business owners often find as they work with accountants to consider value is that there are, perhaps surprisingly, a variety of ways to come up with the business’s specific value. Here is a look at some methods and formulas used in the business valuation process.

 

 

Salable Parts

 

Perhaps the most obvious way to value a business is by adding up the total value of its salable parts. This is also known as an asset-based valuation.

There are actually several ways to arrive at an asset-based valuation. One is called book value, which is the amount of owner’s equity on a business’s balance sheet. Another is called liquidation value, which is the amount of money that would be generated by selling the business within a relatively short timeframe. While these numbers may provide a baseline business value, they are limited ways of arriving at a true value for a number of reasons.

For one, many businesses do not maintain a significant amount of assets, perhaps they are a service-based business that is an integral part of a community; such a business would probably be more valuable than its asset-based valuation. While it doesn’t tell the whole story, being aware of your asset-based business valuation is still a good idea.

 

Historical Earnings

 

Valuations based on historical earnings are usually a more accurate measure of a business’s true value. These valuations can be based on a company’s ability to pay debt, a capitalization of a company’s earnings/cash flow or a capitalization of their gross income. Whichever method is used, this way of looking at value focuses on how the business is able to function on a consistent basis and thus how valuable it would be for a potential new owner.

 

Assets And Earnings

 

Of course, business valuation professionals are also able to use a combination of assets and earnings to arrive at an accurate valuation. A combination is used especially for estate and gift tax situations, when a business value must be determined in order to pay a certain amount of taxes to the IRS. Many larger companies and newer companies also conduct valuations based on future earnings. No matter the formula used to assess value, like anything else, a business is worth whatever someone (or some bank, or some group of investors) is willing to pay for it.