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Business sales: getting an accurate valuation, P.2

In our last post, we began discussing the topic of business valuation, which is an important issue for those in business to have a grasp of when they approach the issue of selling their company or passing it on. As we noted, experts in the field identify several different approaches to business valuation. We’ve already briefly discussed the approach of the business’ assets or its income.

A third approach to business valuation is to look at a company’s market value. The main thrust in this approach is to evaluate what the business is worth by comparing it to other businesses of a similar size, in similar industries, in similar sized markets. This approach is somewhat like real estate appraisal in that comparables are consulted and used as a base for pricing a business when placing it on the market. 

Although one can talk about three different approaches to business valuation, it isn’t necessarily that these approaches are opposed. It’s just that these different approaches may be more or less appropriate depending on the particulars of each business, including how long it has been around and how risky it is as an investment. Ideally, these approaches would match up and make it clear how much a business is worth, but that just doesn't always happen.

Those who are looking to sell their business would do well to work with an experienced team of professionals when selling a business. Doing so will help one to have a realistic idea of what their business will go for on the market. An experienced business attorney is a valuable resource when selling a business, and can help with issues of contract rights, employment agreements, and various other legal issues that need to be addressed.

Source: The Lane Report, “Business valuation is science and art,” Greg Peath, October 16, 2014.

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