Those who are considering purchasing a business or putting one up for sale will often start with a valuation. Both sides need to agree on roughly what the business is worth in the current market. The valuation may not give them the direct selling price, but it gives them a spot to start the negotiations.
What kinds of things are considered during that valuation? Understanding what goes into the process can help business owners see why there may be disagreements and what steps they should take moving forward.
Current market value
To start with, the current market value of the assets that the company owns has to be evaluated. How many tangible assets does the company have? Do they have any stock or inventory? Will the business come with employees, equipment and other assets?
Projected earnings
Next, business owners have to look at the future earnings. It can be helpful to look back at past trends. Have the overall earnings been going up by a certain percentage every year? Have there been any declines that need to be explained? Have there been any changes to the market – such as a local recession – that could impact these earnings?
Other key details
The two areas above offer a good starting point, but there are many details that will be specific to the case. What does the company’s management group look like? What is its capital structure? What types of debts are still owed? What is the business’s reputation and how successful has the branding been?
At the end of the day, the key is to carefully consider all relevant factors to make an accurate valuation. Business owners can then begin moving forward with the process of buying, selling or otherwise transferring ownership of that business, carefully considering their legal options as they do so.
