How to Value a Business

Are you looking to buy a business? Do you know how to determine the value of that business? Without a solid system in place of valuing a business, you could find yourself investing in a dud that will become a money pit of the sort legends are made of. Unfortunately for the average consumer, calculating the business value is one of the most challenging aspects of the business buying process.

Valuing a Business is Not an Exact Science

Even with ideal information to plug into the formula, there is a lot of room for errors. That is because it is not an exact science. In fact, some would call it an art rather than a science. More often than not, the “asking price” for businesses is very different from the ultimate value of the business. Sellers and buyers, in the world of business often have wide differences when it comes to the valuation of the business.

Why is that?

Part of it is the emotional factor. Especially if the business is one the seller built from scratch. He or she may have an emotional attachment that has nothing to do with the actual worth of the business. Unfortunately, the years of hard work, blood, sweat, and tears he or she put into building and growing the business often have very little to do with the actual value of the business.

These are the things that affect the value of a business:

• Earnings history and income.
• Location of the business.
• Business assets.
• Growth positioning.
• The reputation of the business.
• Management team (strength and depth).

None of these factors have anything to do with the current owner’s investment of time, energy, and love in the business. They are measurable, quantifiable factors. And they matter a great deal to you and your future success if you choose to make the investment.

It’s also a good deal to do a little investigating of your own about the current business climate, how the business is performing, and why the seller is seeking to sell. The more facts you have about the business, the more accurate your valuation becomes. One other thing you should find out about the business is the role the current owner plays in the value of the business. For instance, if he is a major influencer in the field or has specific skills and talents you do not possess, is there someone within the organization that can match his qualifications that you will be able to employ?

If the current owner is a key person of influence within the industry, the business could take a hit when the business changes hands. That is something you need to understand and have a plan for, should you buy the business.

The more you understand about the business valuation process, the better-informed decisions you can make when it’s your turn to buy a business. Let us help with our business valuation tools.