| Whether you are still working on a business plan | | | | assets, cash flow and liabilities are always |
| for your startup or have been running your | | | | important in determining the worth of a business. |
| company for decades, you like most | | | | "Soft figures" such as income and cash flow |
| entrepreneurs probably have a dollar value in mind | | | | projections can be very important to a buyer or |
| at which point you plan to sell your business. Isn't | | | | investor interested in the company |
| that one of the main reasons why we take the | | | | "Intangible assets" such as patents, brands, |
| risk of starting our own business - to eventually | | | | quality or reputation of management, location, |
| sell it for big bucks? | | | | recipes, processes, technology, customer lists or |
| But, before you put a down payment on that | | | | goodwill often have a hand in determining the |
| new yacht or buy that vacation home on a far | | | | overall value of a business. |
| away island, be sure you have a firm | | | | There are many reasons to value a business, and |
| understanding on how your company will be | | | | "the reason" for the valuation is typically an |
| valued by the marketplace. The value you place | | | | important factor in deciding how an appraisal will |
| on your business may not be what the market | | | | be performed. This is why in many instances, |
| values it at, and that may leave your checking | | | | more than one value can be correct. |
| account a bit lighter than you expected. However, | | | | As indicated above, two of the more common |
| understanding the value of your company today | | | | reasons to value a company are for a sale or for |
| will enable you to make adjustments in your | | | | estate tax purposes. Other purposes for |
| business plan to ensure you hit your valuation | | | | performing a valuation might include acquiring |
| number when you are ready to sell to the highest | | | | insurance coverage of various types, attracting an |
| bidder. | | | | angel or venture capital investor or seeking a |
| Valuing a business is always an imprecise science, | | | | credit facility from a bank or finance company. |
| even with large-cap public companies. For example | | | | The key considerations that go into any valuation |
| - Is the value of a large public company based on | | | | include: |
| its market price? It's book value? It's potential | | | | Company, competitor and industry |
| worth if broken into parts that have more | | | | information. How is your business performing and |
| perceived value than the whole? The answer is | | | | how does it compare to your competitors? What |
| that there are many ways to determine the | | | | is the state of your industry? Is your business in |
| value of a company. | | | | a growth industry or a declining one? |
| Perhaps the best way to understand the "value" | | | | Analysis of historical financial statements. |
| of any business, large or small, is to look at who's | | | | Ratio analysis such as return on equity or gross |
| doing the valuing and for what purpose. For | | | | margin is often helpful. |
| example, we'll wager that you would value your | | | | Projected financial statements going out three |
| family business differently for estate purposes | | | | to five years can be particularly significant, |
| versus a sale of the business. | | | | especially if they are recast to reflect the |
| Regardless of how a business is valued, there are | | | | business without owner compensation. By |
| both quantitative and qualitative factors that play | | | | recasting statements, the value can be estimated |
| a role in a comprehensive appraisal. Many of the | | | | as if the business were under different ownership |
| elements that go into a business valuation can be | | | | or managed under different circumstances. |
| classified in three categories: | | | | Using a method of valuation that is |
| "Hard numbers" such as historical profits, | | | | appropriate for the purpose of the valuation. |