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  • Wen Capital Advisory Group

What is the Value of Your Business



In the second quarter of 2023, more than 2,300 small businesses were sold. The median sale price was roughly $300,000, down 14% from the same time last year.1


As a business owner, ascertaining the value of your business is important for a variety of reasons, including business succession, estate tax estimates, or qualifying for a loan.


There are a number of valuation techniques, ranging from the simple to the very complex. Outlined below are three different approaches to valuing a business.


  1. Asset Based: Calculates the value of all tangible and intangible assets held by the business. This approach ignores the future earning potential of the company. Thus, a pure asset-based valuation model is often used for companies that are bankrupt or looking to liquidate.

  2. Earnings Based: Seeks to arrive at a business’ value by applying a multiple to normalized earnings, i.e., earnings adjusted to subtract owner’s compensation and related expenses. The multiplier can vary substantially, depending upon the industry and the outlook for the business.

  3. Market Based: Compares the business to recent sales of similar companies.


Business valuation is not just a formulaic exercise. For instance, there is a value to the business of being a “going concern” as opposed to the start-up alternative.


Ownership percentage will also matter; purchasing a minority share that has limited control may result in a discount to the actual value. The prospects for the business can impact its value. A greater premium will likely apply to a company engaged in a leading-edge technology than it would to one involved in a mature market.


Valuing a small business is not an exact science. Some aspects of the valuation may be debatable (e.g., the remaining life expectancy of a machine), while other aspects may be positively subjective (e.g., the value of the company’s reputation).


Willing Seller & Buyer


The true value of anything can only be determined when a willing seller and a willing buyer agree on a price of exchange. As a consequence, any valuation exercise may yield only a rough estimate.


Before moving forward with a business valuation, consider working with legal and tax professionals who are familiar with the process. Also, a qualified business appraiser may be able to offer some valuable insight.


CITATIONS:


This material does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

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