News & Resources

A formula for business valuation

Jan 07, 2011 Brian Bradley

It may not have been an easy decision for owners to sell their businesses. Whether they can't financially support the venture anymore, it's just time for a change, or there's another reason altogether, entrepreneurs must figure out how much their business is worth before it can be sold. Although it can seem daunting, it is important to evaluate all finances and other aspects of a business to make sure owners get the best turnaround for their investment. There are many business valuation tools out there to help owners arrive at an appropriate asking price for a business. The Business Owner's Toolkit explains that business assets are very important in the calculation. Anything that can be discovered from a credit check or background screening could have an effect. Assets such as debt-paying ability, capitalization of earnings, dividend-paying ability and cash flow will all be unveiled. The market for similar businesses and comparable sales will greatly control the price of a business as well, according to the website. The publication also suggests hiring an expert appraiser as a safeguard because the process can be very complex and time-consuming. After acquiring the help of an expert, there are several major approaches used to put a price tag on a business. Business valuation methods fall into a number of categories. According to Inc. Magazine, recent years have proven to be a buyer's market because business valuations have been down. This may be bad news for business owners looking to sell, but great news for entrepreneurs hoping to acquire an existing business - a silver lining to the economic downturn. However, as the economy begins its swing back to normalcy, that window may soon close.