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How can one properly value a business for sale?

This blog recently discussed key steps to starting a business in Louisiana to help set it up for success. Regardless of the success of the business, there may come a time when the owner may wish to sell the business. When a business owner contemplates the sale of a business, they may have a number of important questions they need answered before selling what they have built. One question may be how to properly value their business to sell.

It is important to determine what your business is worth to arrive at an appropriate selling price for your business. In general, there are different options for valuing a business. Different business valuation methods can include a market-based approach, an asset-based approach and an income-based approach. How a business is valued depends on the business's unique situation, but one type of business valuation methods may be more appropriate in certain circumstances.

The market-based valuation method looks at the sale of businesses in the same or similar industry and takes the average of the sales. Depending on the circumstances, the market-based valuation method may not capture the true value of the business because sellers may have had different motives for the prices they accepted for their businesses. The asset-based method looks at the fair market value of the assets to determine the value of the business. The asset-based valuation method, however, may not take into account intangible value such as the business's customer goodwill or other considerations. The income-based method, perhaps the most commonly used, evaluates the cash flow of the business measured against the debts of the business.

There can be additional important aspects involved in the valuation of a business, so it is always important to be familiar with these details. The valuation of your business is an important part of preparing to sell your business, but there are many important considerations for sellers to be aware of throughout the process of negotiating and finalizing the sale of their business that sellers should know how to take into account.

Source: FindLaw, "Business Valuation Methods for When You're Ready to Sell," Accessed March 20, 2016

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