Do you know what your business is worth? You may need to know this because you are getting divorced and have to divide assets. Or, perhaps you are thinking of selling your business so you can retire. You want to price your business to sell, but you don’t want to get cheated, either. That’s what makes proper valuation of your business so important.
There are three common ways to value a business:
- The income approach: This aims to calculate how much money the business brings in for its owners, and can bring in for anyone who buys it. Just because a business is profitable now, does not mean it has a long healthy future.
- The asset approach: This looks at what assets a business has. A sports team is worth much more when they have their star players tied down to five-year contracts, than if they are all about to leave on free transfers. Make sure you have your intellectual property legally secured.
- The market approach: How much will someone pay for it? Look at other similar businesses that have sold recently. However, be aware you are rarely comparing like for like. Just because the 40-seater Italian restaurant across the street sold for $1 million does not mean your 80-seater French restaurant will sell for $2 million. They may have been full every night, but you have been half-empty for years. You may have a good chef, but they may have a famous chef. Little things can make a big difference.
A business attorney can be crucial when building your company. Failing to have the correct contracts in place to protect your business rights could lead to it being worth a lot less than you hope.