Front Range Business, Inc. acknowledges that business valuation is as much an art as a science. While business valuation does employ standardized formulas and methods to calculate value, assumptions are made that are based on experience in the marketplace and familiarity with similar businesses. This process includes the selection of the most appropriate risk and return variables, and the most appropriate comparable sales. In this way, the collected data and applied expertise lead to the best calculation of value for a specific business.
The value of a business is based on three things: what it owns, what it earns and its risk versus return.
1. What it owns
A business owns tangible and intangible assets. The tangible assets are the furniture, fixtures, equipment, inventory and real estate. The intangible assets can include the trade name, contracts, leases, processes, client lists, licenses, recipes and patents.
2. What it earns
The business owner derives certain financial benefits from owning a business. The benefits generally come in the form of business profits and a salary for the owner. The business can also provide the owner with fringe benefits such as health insurance, a company car or a retirement plan.
3. Risk versus Return
Every investment has a perceived level of risk and an expected rate of return. In determining the goodwill component of the business sale, the likelihood of future income and the replicability of current income are quantified.
Beware of “Rules of Thumb”
There are many different rules of thumb available, but in most cases they do not give an accurate value of a business because they are based on an “average business.” Even though most industries have one or more such rules, there are not any “average businesses.” Each business is unique and a particular rule of thumb can be off by as much as 100% or more. The business valuator will be able to decide what is the most relevant information about a business and then make an informed decision about its value.
Free Online Business Valuation Calculator©
If you want to try your hand at a self valuation, check out our Free Online Business Valuation Calculator©. It’s fun and easy!