Business sales and valuation methods

Business sales and valuation methods

On Behalf of | Apr 11, 2019 | Sales & Dissolutions |

The decision to sell a business is not one to be made lightly. After all, a lot of hard work goes into building, maintaining, and running a business. This can create emotional attachment in some instances, while others find themselves so frustrated with a business that they hope they can quickly shed it.

Regardless of one’s feelings about his or her business, there often comes a time when selling it makes financial sense. Before one allows his or her emotions to take hold, though, due consideration must be given to the true value of the business so that a fair deal can be reached.

There are several ways to valuate a business. The first is called the market approach. Through this method, an individual looks at the recent sale prices of similar businesses in the same industry. While this method may give a general idea of a business’s value, it may not take into account all of the facts at hand, and it may lead to the creation of a sale price based on businesses that were undervalued at the time they were sold.

Another method is the asset-based approach. Here, a business simply tallies the value of all of its physical assets by utilizing their fair market value. Again, this method has its limitations, primarily in the fact that it doesn’t take into account intangible assets such as a business’s reputation and marketing prowess.

The most commonly utilized method of business valuation is the income-based approach. This method assesses the income derived from the business while taking debt into account. Of course, even within this category there are a number of approaches. However, many business owners find that this method provides the most accurate snapshot of a business financial viability.

Selling a business can be stressful. There is often a lot on the line, and the outcome of the sale can set the financial stage for one’s next chapter in life. Therefore, before agreeing to sell a business, Baton Rouge-area business owners should consider discussing the matter with a business law attorney who is experienced with this process.