The Main 3 Valuation Methods for Company Sales

Building a business takes a significant investment of your time, energy, and passion to be successful. If you have planned your company well and had a bit of luck in the market, your company will reap monetary benefits that will sustain you for both the present and the future – until you decide to cash out and sell your business.

Selling your company is often a very hard decision to make for business owners, given the understandable attachment many feel for the company they grew from the beginning, but it can be an opportunity for you to garner the most benefits from your company when you need them and allow you to begin your next personal or professional endeavor.

Before you can seriously consider selling your company, however, you must have a realistic idea of the combined value of your business’ combined investments, assets, and future worth so that you make sure you are getting a fair price for all your hard work.

You can get an initial idea of your company’s worth through tools like business valuation calculators, but the best way to receive an objective business appraisal before you decide to sell is by consulting a professional business valuer or appraiser who can use one or several different business valuation methods to guarantee that you get a good price for your company:

Asset-based Approaches

Asset-based approaches are most companies’ first step in business appraisal, usually falling into one of two categories.

The going concern asset-based approach or book value approach calculates a company’s value by simply looking at its stated assets and subtracting the value of its liabilities according to the business net balance sheet.

This method often undervalues a business because it uses values according to the balance sheet, which logs amounts based on historical values and not current market prices. This approach is useful to create a minimum company value amount.

The liquidation asset-based approach is even more basic, calculating the value of your company according to the amount that would be left were you to quickly sell your company and pay off all liabilities and debts.

In reality, there is little point in negotiating a sale of your company if you accept its liquidation value; simply closing up shop will get you that amount, while negotiating a sale will take time and money actually decreasing the amount you receive. This value is well below what you should expect for selling your company and is most useful as a negotiating point for a higher price.

Future Earning Value Approaches

There are multiple future earning value approaches that are based on the idea that your company’s value is based primarily on its ability to generate profit in the future.

The most common is the capitalizing past earning value approach, which uses a company’s record of past earnings (normalized for any extraordinary revenue or expenses) multiplied by the expected future cash flow and capitalization factors to predict the company’s future profit.

This approach provides the buyer with a good idea of their rate of return on investment were they to acquire the company, in addition to the probability that these levels of profit will be reached (risk factors).

Market Value Approaches

Market value approaches value a company by comparing it to similar companies that have recently been sold in the market. Of course, this method is only possible when a basis for comparison is available, meaning that at least a few similar companies in terms of sector and size have recently been sold.

Unfortunately, information about acquisitions and mergers of smaller companies is often difficult to obtain making the market value approach a tool available primarily to professional appraisers or those with insider knowledge.

Valuators often combine the market value approach with other approaches to make sure that your company sells for a fair price at the market standard, an important differentiation.

These are just some of the most common company valuation approaches available to help you understand the value of your company. If you are considering selling your company, first do some research yourself with available valuation calculators, but ultimately you will most likely get a better price for all the hard work and monetary investment you have put into your company if you choose to work with a professional business appraiser.