When it comes to valuing your business, it is likely that you will have an emotional attachment in the process. Business owners are like home owners who almost always think their property is worth more than it really is. That is human nature. However, all emotion must be put aside before a business can be successfully valued.
A business valuation is the formal process of determining what your business is worth.
It is important to know what a business is worth when you are:
- Selling a business (sellers are looking to maximise the sale price)
- Selling a share in a business (e.g. partnership dissolution)
- Buying a business (buyers are looking to gain the maximum value possible for their purchase)
- Attracting investors
- Getting a business loan
- Valuing your own net worth
- Business planning
- Retirement planning (business owners need to understand whether their assets can support a comfortable life when they retire)
- Tax reasons
- Situation changes (e.g. business restructures)
- Family settlements (disputes such as divorces, where it is important to ensure that assets are distributed fairly and equitably).
All of these reasons for business valuation are centralised around large decisions, negotiations and often involve resolving conflicts between parties. There are different ways to determine business value , with valuations generally based on a combination of methods.
There are four commonly used business valuation methodologies for small businesses:
- Earnings multiple
- Discounted cashflow
- Asset valuation
- Comparable Sales
Earnings multiple and discounted cashflow are the two most commonly used in privately owned businesses.