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Do you know much your business is worth? The value of your company is often irrelevant to day to day operations - but if you are considering selling the company, buying out a partner (or taking on new partners), applying for a loan, merging with another business, or developing your estate plan, you may need to know what your company is worth. Valuing a business requires objective analysis of past performance and subjective determinations about your industry, the economy, and future prospects for your company.
These are a few reasons why performing a business valuation may be necessary:
If these or other situations may require you to determine the value of your business, you can use a variety of valuation techniques. Here are a few basic valuation guidelines.
If your business is:
Then you can use one of two basic valuation approaches: Value of assets and value of income.
If you hire an appraiser, the appraiser typically has discretion over which valuation method is used. Most appraisers will perform multiple valuation calculations using different techniques, comparing the results to create a "blended" value. Financial statements and accounting records are analyzed and compared with other companies in the same industry.
There is a wide variety of valuation techniques and formulas to determine the value of your business. Here are a few of the more common approaches:
Seem complicated? It can be. If you're just curious about what the business is worth, you can use one of the techniques above. If accurately determining the value of your business is important - for instance, if you need a loan, are thinking about taking on partners, or are interested in selling the company - getting professional help is probably the best way to arrive at as accurate an estimate as possible.
But keep in mind the ultimate value of a business is its fair market value. Fair market value is what a ready, willing, and able buyer is willing to pay a willing seller, assuming each party is fully informed and is under no pressure to take action; that is the true definition of fair market value according to the IRS.