The value of a business depnds on numerous factors.
Financial experts have proposed many methods to assess the value a business, but there is a lack of agreement among them. You can estimate what a business is worth based on sales, assets, growth projections or try to find a comparable business, which has a market price. You do not have to rely on a single method. It is usually best to arrive at a value by averaging the results of numerous formulas.
Instructions
1. Find a similar business up for sale. The simple and often most realistic way of putting a value on your business is to find a similar one that is either up for sale or has changed hands recently. If you own a dry cleaner, for instance, there are probably at least a few dry cleaners in your city that are for sale or have been sold in the near past. Your local business newspaper or web sites that cater to business owners will have advertisements for such business. The local chamber of commerce might have records of recent sales that you can use as a reference.
2. Add up the value of assets and inventory. If the business is not profitable or the departure of the partner may result in liquidation, compute the value of all assets, such as real estate, furniture, computers and all inventory to arrive at a fair value. The depreciation of the assets must be carefully considered, as old computers and office equipment are usually worth a fraction of the purchase price.
3. Multiply earnings by a multiple. Estimate future annual earnings, based on earnings over the last few years. and the growth rate of the business. Multiply this by an appropriate multiple for the industry. This multiple is called the P/E ratio, and can range anywhere from five to 50. If a business is making $1 million per year, it can be worth as little as $5 million, if it is swiftly losing sales, but as much as $50 million if sales and profits are growing fast. One way of thinking about the P/E ratio is how many times you would need to invest the annual earnings in the financial markets to make the same income. If the business is relatively stable and will make $1 million for the foreseeable future, the same amount of money can probably be made with 20 times that money invested in the financial markets. This would create an appropriate value of $20 million for the business.
