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How to Determine the Value of a Business

how do you determine the value of a business

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Items you will need

    Financial records

Step 1

Choose a multiplier to use when valuing your business. A multiplier is a figure that you multiply by your company's annual net profit to find a number to use as a starting place. Most industries use multipliers of 3 to 5 times the company's net profit after interest, taxes, depreciation and amortization have been subtracted out. For example, if your company had an average annual net profit of $50,000 during the past three years, and you choose to use a multiplier of 3, then you'll use $150,000 as a base price for valuing your business before adding in the value of extras such as tangible and intangible assets. Some industries, such as real estate, use considerably higher multipliers. If your research shows that there is a range of multipliers for your industry, base your decision on the amount of uncertainty that a new owner will experience trying to own and operate your business. For example, if you own a closely held company whose success hinges on close personal relationships with customers, use a lower multiplier because you will be taking your personal relationships with you when you leave the business.

Step 2

List all of your company's tangible assets such as equipment and property, and assign each item a value. Be clear about the assumptions and conventions you use when assigning value. For example, if one of your assets is a copier, you might research online or visit used office equipment dealers to determine an average price

for purchasing the copier used. Alternately, you might start with the price you paid and adjust that amount relative to its depreciation period as well as how long you have owned it. For example, if you bought a refrigerator for $1,000 and listed it on your tax return as having a five-year depreciation period, you would list its value as $400 if three years have elapsed. You should also list intangible intellectual property that your business might own, such as a website or a collection of recipes. Assign values to these items based on how much it would cost a buyer to replace them.

Assign a value to your business lease if you lease rather than own your property. A stable, affordable lease is an asset that adds to your company's worth. Make positive adjustments for lease value if your business is based in a particularly coveted location such as a bookstore on a main street near a university. Adjust your business price downward if you hold a short-term lease and a new owner will have to make an expensive move soon. Consult a local commercial real estate expert to help you come up with a value.

Add the base price of your business determined in Step 1 to the tangible and intangible assets value you determined in Step 2. If you own your business property, the result will be the total value of your business. If you least your property, add the result to the leasehold value you established in Step 3. The final result would be the total value of your business.

Category: Personal Finance

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