How much is a business worth? This question has plagued business owners for centuries. Unfortunately, the answer to that question, as to so many in life, is that it depends. What are you trying to do with the business? Why are business appraisals needed at that time? Will the current market conditions change the valuation of a company compared to a year from now? How does today's business owner figure out what their business is worth? Here's some quick insight into how a business is valued and the process that is used to calculate that value.
Exactly how do you figure out how much is a business worth?
Determining business value is a complex process. It involves looking at the business' individual practices, market share, goodwill in the community and income levels. It can also involve the market and industry conditions, the urgency of a sale, the perceived value of the company's brand and any number of other aspects that are often dismissed as inconsequential to the business value as a whole.
Part of the calculations are based on why the valuation is needed. If you need a valuation of your business because you're considering expanding and want to make sure you're on solid financial footing first, you'll need a completely different valuation than someone who is having to quickly sell a business to settle an estate due to an untimely death or the dissolution of a partnership or marriage.
Another area that can come into play is the current industry and market. If the business is positioned to take advantage of new technologies or innovations in the industry, the business' value to drastically increase beyond what the business owner may otherwise calculate. If, on the other hand, the business is floundering due to industry changes or poor market conditions, using an older business value may leave you open to risk as you overextend your credit trying to keep up with poor economic conditions.
Simply basing your business value on similar businesses that have sold recently may not give you an accurate view of your business' value either. If the business you are comparing to has a more favorable location, better position in the industry, specialties that you have not diversified into, different income levels or other aspects that impact the business' overall value, you may be under- or over-valuing your business' actual worth.
Is your business a household name or a newcomer to the industry? This can make a big difference in how reactive your business will be to changes in market conditions. What about your reputation? A good reputation will often improve your business value as your customers perceive a higher value to the products and services you provide when compared to a competitor.
As you can see, the question of how much is a business worth is a very complicated one that requires significant experience to accurately answer. Fortunately, as a business owner, you don't need that experience. A business valuations specialist who has experience in your industry and special area of operation spends their days looking at businesses like yours to determine those values using standardized methodologies developed for specific situations.