Learn How To Value A Business

Value a Business

If you are selling or buying a business, it is important to know value of the business is. Learning how to value a business is the process of calculating the business worth and what it could be sold for.

There are lots of ways to value a business. No way is 100 percent right, though there could be several wrong ways. Basically a business is worth whatever you believe or think it is worth, based on the information available for you to access it. This article details how you could value a business.

There Are Four Factors Affecting Value:

  • Personal circumstances
  • Tangible Assets
  • Intangible Assets
  • Duration

How To Value A Business

  1. Personal Circumstances

Often times the reason for selling a business can affect its immediate value. An owner who is in an urgent need for money would probably accept the first offer that comes, simply because he/she is in need of cash to solve a pressing issue.

If a business is closing, its value would be the sum of its assets, subtracted from its liabilities. The longer it takes for you to sell, the better the price, as this will give room for more buyers to come in, with different prices. Leaving you with the option to choose what is best.

  1. Look At The Value of The Business Assets (Tangible and Intangible Assets)

To properly value a business, the first thing you should be looking at should be assets owned by the business and what their value is. Assuming you are buying a poultry farm you want to ensure that incubators, egg scale, egg washer etc, are in a good shape.   Ensuring that you would not have to replace some of the items you would need to startup a business. So the business is worth the replacement cost.

Intangible assets are non-physical goods that have a value for a specific business purpose, like office equipment, customer goodwill, potential growth, trademarks, reputation, and patent. These assets are usually harder to place a value in and this is where your accountant comes in to help guide you better.

  1. Look Into The Balance Sheet of The Business

Every good business person would have a balance sheet and the balance sheet will give you a very good indication of the value of assets. It is advisable to avoid buying any business from a company or sales person that has no book record. Because this could mean that the business owners are cannot say with certainty how profitable the business is.

  1. Duration

The longer the business has been operating, the better. What this means is that the business most likely have a proven track record and loyal customers too.

Other Issues

You could also value a business by placing a value on the cash inflow. Although revenue is not a good way to value a business. If a business sells N1,000,000 a year it can be equated to N1,000,000 revenue stream. Businesses are often valued at a multiple of their revenue.

Warren Buffett uses what is referred to as discounted cash-flow analysis. He looks at how much money the business generates each year, projects it into the future and then calculates the worth of the cash flow stream “discounted” using the long-term Treasury Bill interest rate. If you are familiar with “net present value” (NPV) you would understand the theory and calculation properly.

Conclusion

The main source of value in a business may be something that cannot easily be measured. Ensure you get expert advice. Talk to your accountant or small business adviser about the valuation of your business.

Do a market analysis online for small businesses or business relating to yours that are for sale and see how much they are going for.

If you are buying a business do not forget to check what intellectual property they have protected.

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Daniel

Daniel is a Chemical Engineering graduate, his passion for research, writing and sharing ideas led to the creation of this blog.

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