A publicly held business can easily figure out its value – just check how the stock price is doing. But if you’ve got a closely held company, it’s a little harder to determine the value.
In law, fair market value is defined as what is agreed upon between a willing and informed buyer and a willing and informed seller under usual and ordinary circumstances. Okay, that makes sense. But, what if there isn’t a buyer standing there? Do you still need to come up with a value.
For purposes of assessing how your business is doing, you’ll need to know the value of the business. But there are also some other times when you need to know the business valuation:
- Buy-Sell agreement,
- Estate valuation,
None of these reasons are too pleasant to contemplate, but unfortunately, they are often a reality of doing business in today’s business climate in the US.
Common Business Valuation Techniques
Some common methods for business valuation are:
Book Value. The value of your business is calculated based on your books. Total assets less total liabilities equals equity, or the book value of your business. The problem with this method is that it’s not able to accurately reflect the value of your business. It doesn’t allow for appreciation and goodwill, plus other intangible assets.
Adjusted Book Value. Two calculations are prepared here, one for the tangible book value of your business and one for its economic book value. The tangible book value starts with the hard assets and then values the intangible assets such as goodwill, patents and the like. The economic book value calculations analyzes the value of the assets of your business based on current market rates, and it allows for valuation of goodwill, real estate, inventories, and other assets at their market value.
Keep in mind that assessing your organization’s business value does not automatically mean your business is about to be liquidated. These metric, along with other financial indicators and financial statements is a key part of your overall financial report card.
There is no way around it, accurate financial information is critical to you as a business owner, and it must not be treated as an isolated exercise which only takes places every time a problem arises and you need to review your numbers. Integrate it into your daily routine, make financial statements a part of your business culture.
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Cash Flow Accounting’s interactive accounting model will help your organization be more cost effective. We will not only show you how you can save money, we will show you how you can make more, and we’ll do it for less than what you’re paying now. Interested? Please contact us at Info@CashFlowAccounting.com for more information.