Startup Junction

While buying or selling a business the biggest challenge is to determine the fair value of the business.

Poor Business Valuation Methods

Recent Financial Statements Method A very common mistake made by most of the business owners is that they value a business based on the recent financial statements. However, they should look at past 3-5 years of the performance and the future 3-5 years of the growth projections and industry outlook to value a business.

Fair Market Value Another common mistake made by most of the business owners is that a business should be sold for Fair Market Value, which is simply based on supply and demand or whatever can be negotiated.

Both of these methods can be financially devastating for someone who is trying to buy a business.

Good Business Valuation Methods

Over the years, financial experts have devised several valuation methods which can be good for valuing a business. Below is a discussion of the few. It is strongly advised that you should hire a CPA to help you with business valuations.

Capitalized Earning Methods

This methods looks at the expected rate of return on the investment (ROI) that is expected by an investor.

Excess Earning Method

This method is similar to the capitalized earning method, except that it splits off return on assets from other earnings. This is a good method to use if you are buying only a part of the business than the entire business.

Cash Flow Method

Mostly used by banks, they determine how much loan can be made against the cash flow so that they can assure re-payment of their money.

Balance Sheet Method

By looking at a Balance Sheet and calculating the tangible assets you can value a business.

Value of Specific Intangible Assets Method

This method takes into consideration the value of specific intangible assets the goodwill of the business.