Business Valuation

How it works

Many factors go into the market value of a business. Basically, though, market value reflects the fair market value of the business's assets and its ability to earn profits and generate cash flow. In very broad terms, value is determined by the rate of return one expects on the investment, not unlike money in a savings account or a stock portfolio.

Most businesses are sold as "asset sales" rather than stock transfers. Asset sales carry much less risk for a buyer, since any hidden liabilities remain the seller's responsibility. As a result, owners usually keep certain assets, such as cash in the bank, vehicles and life insurance policies, and may pay certain bills, so the company's financial information has to be adjusted for these items.

In addition, the company's tax-basis financial reports must be adjusted to reflect the true financial performance of the business. Charges such as excess depreciation or "extra" company vehicles are added back to taxable income. These are just a few of the adjustments taken into account in valuing a business.

Figuring your value

Once these adjustments are made, there are generally two ways to value a small business:

• Earnings-based: on the company's ability to generate sales, cash flow and/or profits.
• Asset-based: on the value of the company's assets.

Which method applies depends on the condition of the business and the industry it's in. In the end, though, a business, like any other asset, is worth what a buyer is willing to pay and what an owner is willing to accept. Beltway Brokerage is qualified to advise you on the value of your business.