When you're looking at buying or selling a company, there's a lot of work involved in determining whether it's a fair bargain. But most people don't know how to price a business for sale. Some look at the income and expect it to stay about the same, while others simply tally up the value of the assets and deduct the liabilities. But there's much more involved in developing a fair price for a company. Here's a quick look at the overall process to help you get started.
Do you know how to price a business for sale? We do!
There are a few different methods used in determining company value. Here's a quick overview of each type.
Asset-based business valuation is focused on the business' value on a balance sheet. It looks at the value of the assets minus the total of the company's liabilities. However, this type of valuation typically does not represent actual company value. It does not take into consideration future business income, the condition of the market, goodwill in the industry or community, or most other areas that truly drive up company value. Though this is the simplest way to determine value, it's quite often the least accurate.
Income-based business valuation can be used in companies that have regular and irregular income. It's commonly used with companies that have had a regular growth rate over the years and expects to see the same rate of growth well into the future. In general, the future income is discounted to allow for current values and the company's value at the time of sale is determined based on that information. This is a commonly used approach for smaller businesses or those who are stable in the industry and market.
But what about when the market the business is in is currently or expected to be in a strong growth spurt? As an example, companies that have spent decades perfecting home automation technology are now seeing strong growth as this technology becomes mainstream. To base such as company on its past income, before the market began to take off, does not accurately reflect the company's future value. One way this type of company's value is determined is using the sale of similar businesses around the same time. A publicly-traded company with similar assets, receipts or income may have its value adjusted to reflect the private company being valued.
Though it can be tempting to work with a real estate agent or use the sale price of other companies to determine company value, the best route to take to get an accurate value is a certified business valuation specialist. These individuals train to determine the best possible approach for valuing a business by using methodologies that have been tested in legal, financial, tax agency and insurance circles. When they determine a company's value, you can rest assured that it will hold up well to outside scrutiny and reflects a fair price for the business.
By knowing the basic process of how to price a business for sale, you can ensure that you're in a better position to understand the niceties of how the business works. When you're considering purchasing or selling a company, having a better overall knowledge of how business and valuation works, you'll be better able to maneuver through the business world.