3244 Brookside Rd 
Suite 140 
Stockton, CA 95219

Estate Read Time: 3 min

What is the Value of Your Business?

In the second quarter of 2021, more than 2,000 small businesses were sold. The median sale price was roughly $320,000, up 12% from the same time last year.1

As a business owner, ascertaining the value of your business is important for a variety of reasons, including business succession, estate tax estimates, or qualifying for a loan.

There are a number of valuation techniques, ranging from the simple to the very complex. Outlined below are three different approaches to valuing a business.

  1. Asset Based: Calculates the value of all tangible and intangible assets held by the business. This approach ignores the future earning potential of the company. Thus, a pure asset-based valuation model is often used for companies that are bankrupt or looking to liquidate.
  2. Earnings Based: Seeks to arrive at a business’ value by applying a multiple to normalized earnings, i.e., earnings adjusted to subtract owner’s compensation and related expenses. The multiplier can vary substantially, depending upon the industry and the outlook for the business.
  3. Market Based: Compares the business to recent sales of similar companies.

Business valuation is not just a formulaic exercise. For instance, there is a value to the business of being a “going concern” as opposed to the start-up alternative. Ownership percentage will also matter; purchasing a minority share that has limited control may result in a discount to the actual value. The prospects for the business can impact its value. A greater premium will likely apply to a company engaged in a leading-edge technology than it would to one involved in a mature market.

Valuing a small business is not an exact science. Some aspects of the valuation may be debatable (e.g., the remaining life expectancy of a machine), while other aspects may be positively subjective (e.g., the value of the company’s reputation).

Willing Seller & Buyer

The true value of anything can only be determined when a willing seller and a willing buyer agree on a price of exchange. As a consequence, any valuation exercise may yield only a rough estimate.

Before moving forward with a business valuation, consider working with legal and tax professionals who are familiar with the process. Also, a qualified business appraiser may be able to offer some valuable insight.

1. BizBuySell.com, 2021

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright FMG Suite.

Share |
 

Related Content

What Is a 1031 Exchange?

What Is a 1031 Exchange?

A look at 1031 Exchanges, a real estate investment strategy that may allow you to defer your capital gains taxes.

Tips to Create a More Effective and Efficient Virtual Team

Tips to Create a More Effective and Efficient Virtual Team

March 2020 brought with it a tidal wave of unforeseen changes — to both our workforce and economy. Ready or not, a huge number of businesses had to pivot quickly to a 100% work-from-home model to keep their employees safe and their operations moving.

The Big Picture–Table 10 is a Hot Spot

The Big Picture–Table 10 is a Hot Spot

What’s the hottest table in economy town? Need a hint? Check the Personal Income and Spending Report

 

Have A Question About This Topic?







Thank you! Oops!

Be My Beneficiary

Financial planning for couples.

4 Ways Whole Life Insurance Can Help with Business Expenses

Owning a small business is a dream for millions of Americans. Starting a business is exciting. It is also a huge commitment that comes with a unique set of challenges....

Tax-Advantaged Retirement Strategies

Heading into retirement with confidence is easier if your strategy includes steps to help minimize taxes. Even though your income is likely to decline, you still could be subject to high taxes if you’re not careful.

View all articles

What's My Potential Estate Tax?

This calculator helps estimate your federal estate tax liability.

Bi-Weekly Payments

This calculator estimates the savings from paying a mortgage bi-weekly instead of monthly.

Impact of Taxes and Inflation

Estimate the potential impact taxes and inflation can have on the purchasing power of an investment.

View all calculators

Managing Your Lifestyle

Using smart management to get more of what you want and free up assets to invest.

An Inside Look at Retirement Living

A number of questions and concerns need to be addressed to help you better prepare for retirement living.

Investment Strategies for Retirement

Investment tools and strategies that can enable you to pursue your retirement goals.

View all presentations

The Latte Lie and Other Myths

Check out this video to begin separating fact from fiction.

The Richest Man in Babylon

In good times and bad, consistently saving a percentage of your income is a sound financial practice.

Safeguard Your Digital Estate

If you died, what would happen to your email archives, social profiles and online accounts?

View all videos