One of the biggest differences between a business owner and an employee is that an employee is building an asset for someone else, the company owner, while the business owner is building an asset for him or herself.
If you’re building an asset, at some point you’ll want to know how much it’s going to be worth.
There are three basic approaches to valuing a business:
(1) The income approach
(2) The asset approach
(3) The market approach
The income approaches determine fair market value based on the income stream times a discount rate or capitalization rate. The discount rate or capitalization rate is used to determine the present value of a future stream of income.
An asset-based approach looks at the value of the assets that your business has built-up. It generally will be based on just real, tangible assets such as equipment or real estate. In a pure asset-based approach, there is no value assigned to the business itself and its cash flow or income stream.
The most common, and most difficult to predict, is the market approach for valuation. What would someone pay for your business? My CPA firm would likely sell for something between 1 and 1.2 times the gross amount of billings. Other businesses don’t have such clear-cut guidelines for sales price. Talk to business brokers to get an idea of how much your business would be worth using this approach.
There are two things to remember regarding the sale of your business: Chances are it will take longer then you want to find a buyer and actually go through the process. And, your buyer will pay more for systems then he will for a small business that is really a disguised job.
Start with a plan, action steps and a way to measure your progress.