Understanding business valuation is an essential piece of business start up information
that you need to learn as an entrepreneur. If you are considering starting a business
or purchasing an existing one, you need to understand how to evaluate
the value of a business, and here are a few things to consider about
business valuation.
There are many different methods that you could potentially use in
order to value a business. All of them have some legitimate points and a
few weaknesses. Essentially, the value of a business is what someone
else is willing to pay for it. Therefore, there is no hard and fast rule
when it comes to valuing a business. You have to take several different
approaches and weigh them against each other to come up with the
closest thing to market value.
Book Value
One of the simplest methods of business valuation is using the book
value. This is also sometimes referred to as net worth. With this
approach, you are simply going to total up the assets of the company and
the liabilities. You are then going to subtract the liabilities from
the assets of the company. The value that you are left with is the value
of the company. While this strategy is very simple, it leaves out a lot
of other variables. For example, you are not taking into consideration
the human capital or projects that you have in the works.
Capitalization of Earnings
Another method that you could use to value a company is the
capitalization of earnings method. This method is going to take a hard
look at how much the company has earned in the past. You might look at a
certain period of time, such as how much was made during the last
fiscal year. You would then use a capitalization rate to determine how
much the business is actually worth.
Economic Conditions
When you are evaluating the value of business, you are going to need
to take a look at economic conditions. Most reports that come up with a
business value start out by summarizing the current economic situation.
During a good economy, the business is going to be worth more than it is
during a down economy.
Total Approach
When you are trying to come up with an accurate value for a business,
you are going to need to look at all of the different factors involved.
Instead of looking only at the liabilities and assets, you need to
factor in the employees, the patents that the company has, and anything
else that could affect profitability.
While business valuations might not be at the top of your priority list as a small business owner, it is an essential component that you must understand...if you are really thinking long term. If you want to take your business into the big leagues, learn what the big guys know.
To learn more about the world of business finance, you can visit www.finweb.com
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