business valuation terms, explained

As a business owner, you will likely need to have your company appraised. Contacting a business valuation company will help you to estimate the economic value of an owner’s interest in their company.

The two key starting points towards establishing your business worth are determining why you need business valuation and assembling all the required information. When you use business valuation, you are using a large economic analysis exercise where your company’s financial information provides key inputs into the process. To do a proper job of this small business valuation, you should have between three to five years of income statements and balance sheets available. Additionally, you can determine the value of your business by comparing the recent sales of similar businesses based on their earning power, risk assessment, and company’s assets.

But, to do this, you need to be able to understand some business valuation terms. Here are five critical terms any business owner should know.

Fair Market Value
When applied to selling a business, fair market value is the price at which the seller and buyer can agree. This is expressed in cash equivalents in a fair and open market.

Going Concern Value
This is the value of the company as an ongoing entity, and it differs from the value of a liquidated company’s assets because an ongoing operation can earn profit while a liquidated company cannot.

The Asset Approach
As one of the three common business valuation tools, this approach calculates a company’s worth by adding up its total assets. This method asks what it would cost to recreate the business.

The Market Approach
Another one of the three tools, this method determines the appraisal value of an asset based on the selling price of similar items while making adjustments for differences in size, quality, and quantity. Additionally, this is used to determine the value of a business’s interest and security.

The Income Approach
As the third tool, this option allows investors to estimate the value of the property based on the income produced. This is computed by taking the net operating income of the rent collected and dividing it by the capitalization rate.

Find out how easy it is to have Banker Valuation help your business succeed. Contact us today.