How Are Businesses Valued?

Entrepreneurs sell their businesses for a number of reasons, whether they’re looking to try something new, or intended to cash in from the very beginning. Selling a business however, isn’t as straightforward as selling real estate or other tangible items, primarily because the company’s value isn’t necessarily set in stone, and isn’t always easy to ascertain. There are numerous factors that influence the price of a business.

Some might say that valuation is a science, and that through thorough research and investigation of all of the details is the only way to get an accurate figure. Others may say that this is more of an art, and only certain people will have the right eye for it. Either way, there are usually a few main things that will be looked at when a business is given a price tag.

Tangible and Intangible Factors

There are two main groups of factors to look at; tangible and intangible. Those factors which are tangible are those that are easily quantifiable, and intangible ones are more open to interpretation, and value can be subjective, such as intellectual property. The ones that are looked at in most detail will depend on the type of business and the industry it’s in, but also the broker who handles the sale itself.

Tangible Factors include:

  • Financial details

  • Real estate

  • Stock

  • Equipment

Intangible Factors include:

  • Reputation

  • Relationships

  • Quality

  • Intellectual property

  • Market competition

The three most common ways in which businesses are valued are the following:

  • Multiple of Earnings – This is where a business is valued according to its profits. The annual post-tax profit is multiplied by a certain amount to get the end price.

  • Entry Cost – This is a method whereby the cost to start the business from the very beginning is established.

  • Asset Valuation – Simply, this totals all of the business’s assets, and then subtracts any liabilities to come up with a price.

There are of course many different ways of doing the above, and the types of business and the circumstances of sale can have a large effect. For example, if a business owner desperately needs to sell quickly, then the price is likely to be lower. The best brokers, such as Axis Partnership, will help ensure that the seller gets the best possible price, which can sometimes be higher than the actual valuation, if the buying party has a particular interest.

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