Only when you know your worth can you negotiate with confidence and get the price you deserve for selling the business you worked so hard to build. There are many methods of appraising a company: which is right for you?
Different Ways of Appraising My Company
The methods of appraising a business fall into three different buckets: income, market, and asset. Here's what those terms reflect:
Income-based approaches fall into two categories: Discounted cash flow and capitalization of earnings.
In the capitalization approach, a business appraiser will look at your cash flow in recent years to gauge a company value.
In the discounted future earnings method, an appraiser will gauge the future value of the company based on its present financial state. Appraisers often use this method when the company's cash flow is unsteady, say when a company had a lean year but otherwise has enjoyed a solid track record.
Asset-based appraisal methods evaluate the company's assets versus their liabilities. An appraiser will value the assets using a fair market approach, then subtract the liabilities from the total of the assets for a business valuation. Company assets include commercial real estate and land owned by your business.
This method works well when the company has a lot of physical assets, for instance when valuing a farm. Asset-based appraisals also work well with companies that are losing value, since the value of the assets is more or less fixed.
In a down market where there may be a glut of resources on the market, an asset-based appraisal may undervalue the company's true worth because the equipment values are lower than typical due to supply and demand.
In a market-based valuation, an appraiser will research recent business deals in your niche and geographic area. By understanding how much another dental clinic sold for, the appraiser can estimate the asking price point for your dental business.
The market-based valuation is accurate and highly useful, since no one can argue with financial data. However, this approach only makes sense when there are recent deals among companies in a similar line of business, similar area, and similar size.
Additionally, market-based approaches do not work as well for sole proprietor companies, where it's much harder to compare like with like because the business owner's relationship with clients influences the value of the company.
Getting an Appraisal of My Company: Which Method is Right for Me?
Once you have an understanding of the different ways of completing a business valuation, you are naturally asking yourself which method is right for your business.
There is no one size fits all answer to the question, since there are so many variables. A skilled appraiser will interview you to learn more about your company, then suggest one or more appraisal methods that will tell an accurate story of your company's value.
While each method has its pros and cons, all of these valuation methods can provide invaluable data before you put your company up for sale. Too many business owners overvalue their company due to emotional factors like pride in the business they worked to build. Setting a company value too high sabotages sale, as it drives away potential buyers and leaves you on the hook until you get willing to bargain.
If you're serious about selling your business and commanding what it's really worth, seek out a business appraiser who has experience valuing companies in your area and industry.