Whether you are looking to sell or purchase a business, it is essential that you understand how to estimate the value of the company. Ask too high a price and you may find that no one is willing to purchase; asking too low a price, conversely, can mean that you do not get the fair value of the business after all your years of hard work. An experienced Bryan business attorney can help you make an accurate determination of the company’s value.
How to Determine Your Business’ Value
There are a number of methods for valuating a business, and your attorney may prefer one over another. The following is one method called the “present to future” formula.
1. Add together the average sales profits and annual percentage of growth, and then combine these with a specific future period of growth. Generally it is suggested that you use a number between 2 and 5 years. If, then, you project profits and growth over five years, add together the expected growth based on the past five years of performance.
2. Add all of your assets together. These include such items as accounts receivable, equipment, land, buildings, fixtures, inventory, and assets. Subtract from this total costs, including accounts payable, loans and lines of credit.
3. Do a market comparison, much like you would for real estate. Use industry trade publications, your newspaper, and actual recent sales in the area.
4. Determine your yearly positive cash flow over the past five years. Use this as a rule of thumb to estimate how your business will perform over the next five years.
Determining Value for Purchases
If you are planning to purchase a business you should refer to its revenue reports. Take into account the profits generated by the business prior to taxes and compensation paid to owners. Next, add together the profits for the next two to five years and divide your total by the number of years estimated. Then you need to multiply this number by at least two. You should also research recent sales of businesses in the area.