Determining Which Method of Business Valuation to Use

Determining Which Method of Business Valuation to Use

The first step in selling a business typically involves determining how much the business is worth. As you go to complete these steps, you’ll find there are a number of methods used for Business Valuation in Minneapolis. How do you know which method of Business Valuation in Minneapolis best meets your needs?

Asset valuation is one method used by many and involves calculating the value of all business assets to determine a fair price. Many choose to not use this method as it doesn’t work for smaller companies. Assets generate revenue, but don’t do much else, and a business could have lots of assets, yet bring in little money. This affects the overall value. The same is true in reverse. A business may have few assets, but lots of revenue and therefore should be valued more, yet isn’t using this method.

Income capitalization is an option for large businesses, but most choose not to use it. The problem with this system is it tends to be too arbitrary. It relies on future income calculations made using historical data, but it also involves a variety of assumptions. If even one assumption is off, the Business Valuation in Minneapolis will be inaccurate.

Some use the rule of thumb method, turning to other businesses within the industry which are of similar size to come up with a selling price. It’s a good starting point, but needs to be honed down more before the final value is determined. This is due to the many differences between businesses which appear to be similar.

The liquidation value is another way to determine a selling price. Here one determines the value of all company assets and how much they would bring in if the owner were forced to sell quickly, usually within 12 months. The major drawback of using this method is it tends to undervalue the business.

Most prefer to use the income multiple method of Business Valuation in Minneapolis. Here one takes the net income of the business and multiplies it by a number to determine the selling price. This makes use of historical data rather than predicting the future and the multiple used is determined by many factors. This is the most effective way to value a business, as time has shown. It involves more than this, but it provides a good starting point. Consider all to determine which is right for you.

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