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Jul
23

Common and Quick Business Valuation Methods

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Business Valuation Methods

small business ArticlesThere are many ways to value the actual worth of a business. The Business Valuation Industry uses a wide array of methodologies. Business owners have their personal assumptions about what their businesses are worth.

Here are 5 common and quick business evaluation methods you can use to determine the value of your business.

  • The Book Method

This method is based on the current market price of assets. For instance, when a buyer is looking into purchasing a company, he might consider the stock certificates. A buyer may not have full access until he has paid off some of the liabilities incurred by the company. But it is also possible for the buyer to possess everything outright. However, these issues are not cast in stone. They vary from one transaction to another. By using the book method, both the buyer and seller agree on a fair market price for the assets.

  • Rule of Thumb

ROT or Rule of Thumb is great for small and medium-sized enterprises. An evaluation is basically made by comparisons. It is a simplification method that is not accurate and should not be fully considered because it might not be correct. However, it gives a rough estimate of how much a business might actually be worth by comparing it to a similar business.

The Internet has made everything easy. It is possible to view businesses listed for sale and get an idea how much you own business is worth. But keep in mind that most businesses would not sell at the actual price that they quote in these listings.

  • PFA Price

This is a Plucked From Air approach where guesses rule about the pricing of a business. This is done without considering any of the formal valuation methods. The danger of using this method is that one can undervalue the actual cost of a business and sell it for cheap. Moreover, an owner might value his business at a price not exactly consistent with the marketplace thereby making it impossible to be sold or acquired by another person.

  • Net Cash Flow

The best means of knowing the worth of your business is to calculate the most recent annual and profit loss statement. This helps to determine the purchasing power of the business and gives a realistic picture of the cash flow that is being generated by the business. Once the figure has been determined, multiply it by number of business categories.

Keep in mind that these evaluation methods offer a cheap and quick idea of the value of a business. They can be used as a benchmark for selling a business. Though in the long run a business is always worth more than what someone wants to actually pay for it.

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