How much is your business worth?
What would you do if someone made you an offer to purchase your business? Even if you’re not interested in selling right now, it’s wise to know what your business is worth. You never know when a lucrative offer may come your way. Or, more important, if you are interested in selling, or in a position where you have to sell, knowing the true value of your company can help you recognize an offer that may be too low.The difference between value and priceAlthough the terms are often interchangeable “price”and “value” are not the same. “Price” suggests an actual compromise between buyer and seller, while “value” is theoretical. You should determine your business’s value before you begin negotiating its price. A valuation sets the price at which the business would change hands between a willing buyer and seller, with neither actually having to act.In order to come to a proper business valuation, the IRS uses the following criteria: the business’s earning capacity, the book value and financial condition of the company; the nature of the business and its history; the condition of the industry and general economic outlook; the value, sales and market price of any publicly traded stock and the value of intangible assets such as goodwill, licenses and patents.What valuation methods are used?1. The earnings approach. This approach considers the past net income, cash flow, present income and future projections. Results are capitalized by a standard multiplier to arrive at a current value. This approach gives added weight to earnings from the most stable periods or recent earnings.2. The asset valuation method considers assets appraised independently. Tangible assets are cash, accounts receivable, inventory and equipment. Intangible assets include goodwill and patents. Usually this valuation method results in a lower figure, since future earnings potential is not considered and is often used to determine a minimum or “floor” value.3. The market comparable approach serves as a basic guideline and is not used to actually value a business. It simply determines a basic price structure by surveying similar companies in the same industry that have been bought and sold recently.When buyer meets sellerTheoretically, the price that buyer and seller agree upon is the fair market value of the business. However, in the real world, buyers and sellers hardly come up with the same dollar amount. The business owner’s valuation is often higher based upon anticipated future earnings while the buyer is more conservative regarding forecasted profits. The differences in price discrepancies are often settled through a method of compromise called earnouts. With earnouts, the price of the business is contingent upon future earnings, perhaps as a percentage of revenues. Both the buyer and the seller must settle on the terms of the earnout before the transaction can take place.Knowing how to value your business isn’t just for those who are ready to sell. It’s wise to know your company’s value since you never know when an offer will come along that you just can’t refuse. We recommend consulting with your financial and legal advisors before making any decisions. Jeffrey Apps and Tracy Tutag offer securities and investment advisory services through AXA Advisors LLC (member NASD, SIPC). They can be reached at 926-6911 or firstname.lastname@example.org.Vail, Colorado