Know your company’s worth
With a business valuation
As a business owner, your company is the engine that drives your success. It’s most likely the primary source of your income and cash flow — and if you’re like many business owners, it may be critical to your future, as a primary source of your retirement income. Any personal or business strategy that you create is highly dependent on the value of your business, since it’s such a critical asset. If you do not have a valid estimate of your company’s worth, you can get one by obtaining a business valuation, which is a professional appraisal of the value of your company.
Why you may need a business valuation
Most owners of closely held businesses can benefit from having a business valuation, but you may find that determining the value of your business now — rather than later — may be especially advantageous if you:
• Plan to sell your business within the next 10 years;
• Plan to fund your retirement from the sale of your
business;
• Are contemplating divorce;
• Are seeking financing, from a lender or investors;
• Wish to update a buy-sell agreement you already have
in place with one or more business partners — or wish
to implement one; or
• Are initiating or updating your estate plan.
There are many business valuation methods. The one that’s right for your company will depend on the nature of your business and your current circumstances. The table below illustrates a few examples.
Business Valuation Method
How it works
Type of business
Book value
Determined by the bottom line of the
balance sheet — assets minus liabilities.
Those with substantial fixed assets,
like inventory and equipment.
Straight capitalization
Both prior earnings and income potential are taken into consideration, similar to the way the price/earnings ratio is used to evaluate public companies.
Those with consistently strong earnings and few tangible assets.
Capitalization of earnings
Similar to straight capitalization, this
method weighs both prior earnings
and income potential. It also uses a
capitalization rate, but first adjusts the earnings for investment income — and also factors in book value.
Those with consistently strong earnings and significant tangible assets.
Years purchase
Factors in the impact of goodwill into
the business calculation, as well as its
book value, adjusted earnings, and
number of years in operation.
Those whose value is pegged to significant intangible assets, such as an established and loyal customer base or a strong and recognizable brand presence.
Appraised value
The value of the business is determined by a qualified business appraiser
Those closely held businesses that are planning a sale, engaging in the succession planning process, implementing a buy-sell agreement, or developing an estate plan.
The factors that will help to determine the value of
your business
Every business is different, but there are various factors that a professional appraiser will consider when determining what your business is worth: