Business valuation methods can be especially difficult for small business owners, who invest themselves emotionally as well as financially into the companies they build. But one business planning industry leader says finding the right valuation method may be the key to making the process less painful and more productive.
“There’s no one-size-fits-all valuation method,” said Joseph Ferriolo, director of Wise Business Plans, which provides individualized, custom-designed business plans for startups and expanding businesses. “But the variation between methodologies makes it even more vital that the business owner — not a potential lender or investor — steer and define the way the company is valued.”
There are three primary avenues to a business valuation: the asset approach, the income approach, and the market comparison method. Each process works best for particular kinds of businesses, and choosing the right method is key to success.
Using an asset-based approach, said Ferriolo, can work for businesses that have a lot of inventory on hand or other quantifiable assets. It is best for retail businesses and other asset-heavy companies and hinges on the proper valuation of the actual goods possessed by the company, rather than concepts such as services provided.
Income-based valuation methods are based on the company’s ability or capacity to produce revenue. Capitalization rates and proper calculations are vital to this method, and this kind of valuation is heavily dependent upon subjective projections. It may be best for businesses with a proven track record of income generation to base projections on.
Much like finding the fair market value of a car or a home, the market comparison valuation method requires finding businesses of comparable size and using their current value to calculate the value of another business. This is especially useful for businesses looking to sell or to provide real-world comparisons for potential lenders or investors.
Finding the right valuation method can be difficult but rewarding, said Ferriolo, and it is a key component to effective business planning.
“Our clients put their hearts and souls into their businesses,” he said. “It’s hard to quantify things as priceless as passion and hard work. But knowing the real-world value of your business can mean the difference between a good business plan and a great one.”
Wise Business Plans(wisebusinessplans.com), staffed with professional MBA writers, researchers, and financial experts, is a trusted partner for businesses across a broad spectrum of products and services. Our mission is to empower our clients to make the best possible business decisions, boost company performance and facilitate their funding success by laying the groundwork for strong businesses that excite, inspire and retain talented and exceptional employees.