Determining the Value of a Business

The Gibbs GroupDetermining the value of a business outside of a building or property can be a challenge. Every successful deal requires a satisfied seller and a satisfied buyer. A successful business sale is when everyone feels like they have compromised a bit are usually the ones that become the best situations for everyone. A favorable sale is when the seller obtains a fair price for the business and the viability of the business is preserved so that it can continue to profit and succeed after the sale.

A main consideration in appraising a business is to determine the value or, the present worth of and future benefits stemming from the ownership of the business. The three elements of value include:

  1. Demand – the need for ownership supported by the ability to maintain the businesses desirability;
  2. Utility – the ability to satisfy future owners’ interest in the business;
  3. Scarcity – the finite supply of competing businesses or supply lines.

It is important to understand that value is not equal to cost or price. Cost refers to actual expenditures like material and labor costs. Price is the amount that someone pays for something. While cost and price can affect value, they do not determine value.

Many factors go into determining the value of a business. The key to reaching the selling or buying decision is knowing what the fair market price for a business is in its current location and business environment. There is no simple formula or rule for computing the value of a business. Each enterprise must be valued as a unique entity.

A business will look attractive to a buyer if it has seen increased profits, consistent income figures and a strong customer base. If you are selling off pieces of the business then obtaining an estimate on each section of the business and having an accounting for what its value is by itself will help with selling equipment, business lists or even parts, materials and furniture.

The fair market value of your business is the value it would have to a prospective buyer – someone whose primary concern is a businesses’ profit potential. In valuing your business, you must look at all your past financials to determine your maximum earning capacity, when it was achieved and what was happening in the market during periods of fluctuation.

An accurate valuation tells the true story of your business and its true earning potential which puts you in an excellent position to negotiate the sale of your business. Knowing the correct value will also benefit a potential buyer, especially if they are seeking financing or business investors who will need to know the value versus the cost of the business.

The Gibbs Group has over 30 years’ experience in determining the value of a business. We can help you get started in the process.
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