What's Your Business Worth?

There are multiple reasons why you might wish to determine a value for your business. For example, reasons include plans to sell your business, estate planning, succession planning, determination of value for estate and/or gift tax purposes, or a determination of value under your company’s buy-sell agreement.

There are three key approaches to determining the value of your business – asset-based valuation, earnings-based valuation and market-based valuation.

Regardless of the method used, there is a fair amount of subjectivity involved.

And, just as when you sell your house, the price that you receive depends partially on supply and demand at the time of sale and how motivated you are to sell.

Asset approach: The assets on your balance sheet are calculated at their current value, and a value is assigned to goodwill.

Earnings approach: Logically, the higher the expected future earnings of your business, the higher the price a prospective buyer is willing to pay.  However, a prospective buyer will also consider the risks that exist as to whether those anticipated earnings can be achieved. Risks could include such considerations as the state of the general economy, the economic outlook for your specific industry, the volatility of your company’s earnings, and whether your business relies on just a few key customers.

Market-based approach: This approach relies on multiplying your company’s past earnings by a number that depends upon the multiple of earnings at which similar businesses have sold. Again using your house as an analogy, if no houses in your immediate neighborhood have sold recently, it may be difficult to find “comps” with which to compare your business to the selling price of another’s business.  And, in a rising market, the selling price six months ago of another’s business may understate the value that could be expected for a sale today of your business.

Other considerations: Prospective buyers that envision the opportunity to grow your business are likely to pay more than financial buyers whose goal is to maximize their return until they eventually sell the business to someone else.

If your business is large enough to employ managers and employees, then the strength of your management team is also a factor in a prospective buyer’s calculation.

Appraisers – not lawyers — provide valuation services. But given the percentage of your net worth that likely is reflected by the value of your business, legal counsel is key to providing you with the proper documents and advice needed for you to best benefit from the business you have worked so hard to build.

©2013 Wittenburg Law Office, PLLC. All rights reserved.

Disclaimer: This Blog is for informational purposes only and is not to be construed as legal advice. If you have questions, please seek the advice of an attorney. An attorney-client relationship is not formed by reading this Blog. If you are interested in Wittenburg Law’s representation of you, you must contact Wittenburg Law for a determination of whether your matter is one for which Wittenburg Law is willing and able to accept representation of you.

Bonnie Wittenburg, Wittenburg Law Office, PLLC, 601 Carlson Parkway, Suite 1050, Minnetonka, MN 55305  952-649-9771   www.bwittenburglaw.com  bonnie@bwittenburglaw.com