by Joseph Maas
Most business owners overestimate the value of their business because they use the rule of thumb, or guesswork, but this is not how the market assesses the true value of a business. A very specific process, called a business valuation, is conducted to calculate a business’s dollar value. By knowing the cash value of your business, you can decide to improve your business so the market’s future analysis will reward you with a sale that truly compensates you.
There are five standards of value most common in valuation proceedings. The specific purpose of your need for a valuation determines which of the five valuation types is best for your situation. The five most common standards are Fair Market Value, Fair Value, Book Value, Intrinsic Value, and Investment Value.
For example, if a divorce is the reason for a business valuation, either the Fair Value or the Fair Market Value standard of valuation is likely the most appropriate; Investment Value would be the right selection if an investor was considering the purchase of a 100-unit apartment building, and so on.
This formula may be familiar to you, and is easy to comprehend.
Present Value = Economic Benefit
However, underlying this simplistic concept is a plethora of calculations! Mountains of data must be sifted and reviewed before a legitimate conclusion can be determined about the monetary value of your business.
Economic Benefit can be determined by cash flow, EBITDA, or net income, among others. Risk can also be calculated against many standards, such as the risk free rate, equity risk premium, size risk premium, and industry risk premium, to name just a few. Each factor must be carefully weighed and its contribution or detriment to the value of the whole must be calculated.
Knowing the true market value of your business today could be an enormous benefit because you will know the precise cash value of your company. Even better, your valuation will pinpoint where your business can be improved. Now you possess the opportunity for developing your business in those areas that need it, so you can sell your business later for even more money.
When you’re ready to learn the value of your business from the market’s perspective, always choose a Certified Valuation Analyst (CVA) to perform your business valuation. Certified in business valuation, these financial professionals can help you improve your business for a more lucrative sale.
To learn more about Joe Maas, view his Paladin Registry profile.
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