There are many reasons you may need to know the value of your business -- if you are considering buying a business, a merger or outright sale, for tax or loan purposes, or for estate planning. Whatever the reason for needing to know this information, trying to come up with a valid figure can be a major effort and challenge.
A realistic business valuation requires more then merely looking at last year's financial statement. A valuation requires a thorough analysis of several years of the business operation and an opinion about the future outlook of the industry, the economy and how the subject company will compete.
There are many hard-to-measure intangibles that are a factor in the value of a business. It is not simply a process of adding up the numbers from a variety of reports. Business valuation has been called an art, rather than a science. Estimates of a business' value by various experts can vary as much as 30 percent.
Not only is there no consistency in methods used, but there is also no consistency in naming the methods. Each method has a variety of names. The important factor in any valuation is that the method used is relevant to your type of business, providing a valid and supportable value.
This wide variety of methods available can be a confusing array to choose from. That is why a professional is often helpful. There are plenty of pros and cons for each method -- and there seem to always be new valuation methods being touted.
If you choose to use a professional, make certain a clear explanation of their valuation method is provided and justified. The current business owner needs to understand the possible valuation methods to be able to clearly defend the price of their business. For a buyer or investor, the reasoning behind the pricing is critical for evaluating the personal risk involved. Of critical importance to all parties is a sense of honesty in the method used.
While there is no such thing as absolute truth in business valuation, confidence in the eventual number is based on the integrity of the underlying process. To assure that integrity, many valuation professionals use more than one method, computing a weighted average to arrive at their final number.
Here are some common Valuation Methods