![]() ![]() In fact, a combination of these three methods may be the best way to get a fair and accurate value for your company. Earning value approaches are the most popular means of business valuations, but that doesn’t mean it’s the right choice for you. If your business and its assets are worth about $5 million but similar companies have been sold in the $2-million range, you may lose money on the sale. This sometimes leads to a business being under- or overvalued. When assessing the market value of their business, owners establish what the business is worth based on similar businesses that have recently been sold. This approach averages the trend of predicted future earnings for the company, then divides it by the same capitalization factor. This rate is what a reasonable purchaser would expect on their investment of the business. This method reports the company’s usage of past earnings, normalizes them, then multiplies the expected normalized cash flows by a capitalization factor. There are two types of earning value approaches: This approach is generally used for a company that is looking to buy or merge with another company. The earning value approach evaluates businesses based on their ability to produce wealth in the future. For example, if a sole proprietor is ready to sell an IT company, prospective buyers of the business would have to take the time to sort through which assets belong to the business and which ones stay with the sole proprietor. If any assets belong to or are in the name of the sole proprietor, separating the value of business assets from their personal assets. For sole proprietorships, however, this approach can be a more difficult means of evaluation. This is a common approach for business owners who are looking to sell their business or get out from under it.Īsset-based approaches work well for corporations, as all assets are owned by the company and are included in the sale of the business.
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