What is My Business Worth?

Small business owners all over the world usually fail to stop and ask themselves just what their business is worth until they are attempting to sell their business or preparing for retirement. However, gaining early perspective concerning the worth of your business from a third party can greatly benefit the future of your business goals and overall direction. If you are at the point of selling your business or planning for retirement, succession, or divorce, this simple question has no simple answer. Depending on what value is being calculated, a third party could conclude on a much different price when assessing fair market value versus another calculation like most probable selling price.

For the sake of simplification, only the most probable selling price method will be discussed here. Since you are probably hoping to determine the value of your company so you can sell it or pass it on to an heir, this is the method that will be determined. Three approaches can be taken, including market, income and asset approaches. Market approach is when your business is compared to similar businesses that sell the same goods or services and how much they were sold for. This cannot be the only approach however, as comparing businesses in different states that are different sizes from one another can throw off findings.

Income approach calculates how much money your business is generating for you on a yearly basis and determining a reasonable price it could be sold at. Since small businesses are a risk and not guaranteed to generate income, an accommodation must be made for the risk factor. Cash flow is identified through a process known as recasting which involves dissecting tax returns and determining how much money actually benefited the business owner. By following trends of past years, you can calculate estimated future returns the business will make for the new owner.

The final approach is called asset approach. Also known as cost approach, this method deals with physical assets but does not provide much value for goodwill. Many businesses place a good amount of emphasis on goodwill, meaning this would not be the best approach. However, if your business has a number of investments in outside sources, this could be a very beneficial method of determining how much your business is worth. As you prepare to put your business up for sale, understand that negotiations will undoubtedly occur and the market will be the ultimate determining factor of what you can sell your business for.

How Much is Your Business Worth?

There are 3 basic approaches to value your business: the Asset Approach, the Income Approach and the Market Approach.

The Asset Approach is based on the principle of substitution. Meaning, it assumes that no prudent buyer / investor would pay more for a particular business than the cost to reproduce it right across the street. The main flaw with the Asset Approach is that it does not do a good job of capturing intangible value (goodwill). How you (and your employees) treat your customers and the reputation you hold in the marketplace is not something easily duplicated (and therefore valued with the Asset Approach). So, beware of the limitations of this approach. Understand that although an Asset Approach provides a relative indication of value for highly asset intensive companies, it may serve merely as a liquidation value for your service oriented company. The Income Approach and Market Approach do a much better job of fairly capturing the value of your company’s goodwill or intangible value.

The Income Approach operates under the assumption that a buyer will pay for the cash flow that your business is set up to produce going forward as of the date of sale. Buyers buy cash flow. How much they are willing to pay for access to your cash flow depends on the risk associated with the buyer actually receiving it once you exit the business. If your company shows a consistent history of steady cash flow and/or growth a buyer is likely to pay more for your cash flow stream (less risk) than for the cash flow stream of a similar company with unstable cash that cannot reasonably be assumed to reoccur in future periods (more risk).

By valuing the cash flow of your company you are inherently valuing EVERYTHING that your company does. If your company did something different (made different decisions or operated under a different philosophy) your cash flow would look different and the value of your business would be different. Your cash flow reflects all the decisions you make within your company. So, I challenge you with this question, if the decisions you are making don’t increase your cash flow (and buyers will pay you only for your cash flow) why are you engaging in those activities that don’t result in increased cash flow? They are not adding value to your company.

The third approach to value is the Market Approach. If you own a home or have rented an apartment, you’ve done a form of the Market Approach. When you compare and contrast similar properties and then use the comparative data to value your property, you are doing a Market Approach. In residential real estate you may compare things like price/sq.ft. or price/bedroom and price/bathroom. Once you obtain these ratios from similar properties you multiply the ratio by the square footage, the number of bathrooms, or the number of bedrooms in your home to get to a value for your property.

You can do the same thing with businesses. However, as you may have guessed, the value of your business is not driven by its square footage and its bathrooms. It is driven by other metrics such as revenue, assets, growth, leverage, turnover, liquidity, etc. Publicly traded companies and transactions involving other private industry participants provide an understanding of how price relates to the various financial metrics of these companies. Then, just like we did in valuing your property, we apply these market ratios to the metrics of your business to determine its market value.

Valuation is a complex matter with many intricacies that are not discussed here. The purpose of this article is to familiarize you with the basic valuation approaches employed. I don’t recommend that you attempt to value your business without the help of a qualified expert. But, I do encourage you to gain an understanding of these approaches so you can better focus on building value within your business before it is time to sell.

Is An Online Home Business Worth The Effort?

The idea of setting up a work from home internet business does appeal to a lot of people but many never actually doing anything about it. Having your own ‘part time business’ that brings in extra income and satisfies your inner entrepreneur desires sounds great, but is it really worth the effort?

How can you build an online home business if you don’t have anything to sell? And, suppose you did have a product or service, how would you actually sell it on the internet, or get it shipped to the customer and then receive payment for it? These challenges are often the obstacles that aspiring online business owners believe will prevent them from ever getting a business on to the internet. But these barriers that are simple to resolve.

Where Do You Start?

The global economical problems over the past few years have been very tough for conventional business ‘offline’ owners. But, conversely, there has been a huge increase in the number of people buying goods and services on the internet. This is good news for people who have taken advantage of internet home business opportunities.

Probably the most popular strategy that entrepreneurs use to generate revenue on the internet is affiliate marketing. Although there are many online home business models available, affiliate marketing must rank as one of the top ones, if not number one.

Basically, the affiliate marketing model is when you promote someone’s product over the internet. You can sell digital products, tangible products, or both. Digital products include eBooks, video courses and membership websites that can be used online or downloaded directly to the customer’s computer. A tangible product is something that is physically delivered to the customer’s address.

A Proven Home Business Model.

Affiliate marketing is great way to start a work from home internet business. There is a wide range of different business markets that you can get involved in. You do not need your own product or hold any stock. Additionally, you don’t have to organise any deliveries or get concerned with payment systems as the product owner takes care of all of these issues. Your job is to find the customers and promote the products to them. When they buy something, the product owner pays you a commission.

When starting your own online home business, the main thing is to get involved with an industry or product line that you like. It will be challenging to keep your commitment going with any type of online business if it concerns something that does not interest you.

Having a work from home internet business is very fulfilling. As your business grows you can enjoy the extra income that it delivers and have the satisfaction that you have created it. Eventually as it becomes more profitable you may be able to give up your regular day job and enjoy the freedom that of working when and where you want so long as you have a computer and access to the internet.