We looks at some of the calculations used to compute business value – let us now look at the principles behind business valuation models so that you can get a better understanding about what valuation tries to achieve.
Asset based Business Valuation Methods
Here a prospective seller will favour the asset based methods if the companies earning are not better than the industry standard and he stands to get a better deal is he can convince the buyer that the underlying assets of the business are of high value.
This happens very frequently in businesses that have been in operation for a long time and have invested in real estate in prime locations and the value of those properties have appreciated over a period of time.
Also if the company has an easily recognisable brand or valuable patents the seller will try to highlight these factors to the buyer to encourage a higher offer for the business. What you need to do to here is make a list of all the tangible and intangible assets of the business and see if it exceeds the income potential of your business. If it does it is better for you to adopt the asset based valuation for your business.
Income based Business Valuation Methods
In the income based approach take a look at the earnings and cash flow of your business if this is considerably higher that then industry average then there is a compelling argument to value the business based on the income approach.
Carefully study how your business is managing to generated such a high income and if the reason is the people involved in the operation then the buyer will want to buy the operation and you also have to guarantee that the staff will stay on with the business at least for a year.
It is traditionally more difficult to sell a business based on the income model as the buyer needs to know that the business will be able to function as a going concern even if you divest your interest in the business. Therefore you may need to give some sort of guarantee to the buyer that is will continue to function as expected at least for six to twelve months.
Market value based Business Valuation
The market based approach to valuing your business is a way to measure your business vis-à-vis your competition and the greater your ability to face the threat posed by bigger competitors the greater likely your ability to command a higher price.
The business might have a significant patent or trademark that ensures business strategic advantage and competitive advantage – the implies that the business market value is high.
It is quite difficult to compute a Dollar value in this type of situation but more bidders to provide competing bids is a sure way of negotiating a higher price.
In other words here the market price will be determined by the prospective owners desire to purchase your business.
Also take a look at this article that give further keen insight into how you should value the business and which approach will yield the best result in terms of the highest price.