Business owners in Virginia may spend many years cultivating what was once a simple "mom and pop" operation into a large, successful business. However, the day may come when a business owner in Virginia wishes to sell his or her business. When this happens, business owners looking to sell their business will need to determine what an appropriate value of the business.
There are three basic business valuation models: an asset-based method, earning-value method and a market-value method. Each of these models establish the value of a business. This is only an overview of this topic -- business owners looking to establish the value of their business should have it done by a professional.
When it comes to an asset-based valuation, it can be calculated in two ways. One is known as a "going concern" method. In this method, the business' liabilities are subtracted from its net assets.
Another asset-based method for business valuation is known as "liquidation." In this method, the business calculates the amount of net cash it would have if it sold all its assets and paid off all its debts.
When it comes to earning-value methods for business valuation, the most popular method is "capitalizing past earning." Through this method, a professional will come up with an estimate of the cash flow. This amount will then be "normalized" for any unique revenue or expenses. Finally, this amount is multiplied by a "capitalization factor," which is calculated as the expected rate of return on a purchase, along with the risk that the estimated earnings will not be made.
Finally, there is the market-value method for business valuation. Through this method, the business will be compared to other ones like it that have recently been purchased. Of course, this method is only viable if there are enough similar businesses that have recently been purchased to compare one's business.
Determining which business valuation model to use can be difficult. Each has its plusses and its minuses. In the end, each business must be valued on a case-by-case basis. Therefore, it is something that is best left to the hands of professionals.
Source: the balance, "3 Business Valuation Methods," Susan Ward, Dec. 14, 2016