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How To Increase The Value Of Your Business

3 Proven Ways To Determine The Value Of Your Business

posted by mpactventures
Jan 25, 2020 1255 0 0
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Key takeaways for “3 Proven Ways To Determine The Value Of Your Business”:

  • 3 ways to help determine the value of your business
  • Why certain approaches may not be suitable for your business
  • Using multiple forms of analysis to come up with fair value

3 Ways To Determine The Value Of Your Business

Owning a business is a dream that many people have. When most people start a company, they could only dream of it being so successful that they earn a sizable income and develop something that is worth a lot of money. At some point of the business ownership cycle, there could come a time in which you need to determine the value of the business.

Whether it is to sell the company, raise capital, or take out a loan, having a keen understanding of your business valuation is very important. While many people will eventually need to understand the value of their business, the process of determining the value can be rather complex. Fortunately, there are three processes and tips that you can follow that could help to determine the value of your business.

Asset Based Approach

One of the most common ways that someone will value a business is by starting with the asset-based approach. This is often considered one of the more simple ways to value a company as all it is doing is assessing the value of each underlying asset and then combining all assets to determine the true company value.

This process will often require a lot of work to appraise the more significant assets, which could include heavy machinery and equipment, inventory, accounts receivables, and even real estate. Another asset that can be harder to quantify is the value of the relationships and future income streams that are attached to a growing list of clients.

Market Approach

The market approach can be used in some situations to come up with the value of your business With this form of an assessment, a business appraiser or consultant will assess how much other businesses in the area have sold for in recent years. This assessment can be very helpful when there are a lot of direct competitions, such as if you are valuing a restaurant franchise that has a lot of active sales. However, if your business is unique, the approach may be a good starting place but will not get you all of the information that you need.

Income Approach

Finally, the income approach is a common way to come up with the value of your business. With the income approach, the assessment will involve diving deep into your financial statements to determine your true adjusted revenue and after-tax income. It is also very common to apply a multiple to both of these figures to come up with the final value. The multiple that is used is often based on multiples that were applied to the sale of companies that were in the same industry.

While stabilized companies that have a long history of operations can be valued by using historical income statements and tax returns, it can be harder to value a company using this method if they are in the growth stage. Companies that are continuing to grow and have spent a lot on marketing and customer acquisition costs may not have a very positive bottom line. However, the potential that they provide can give a lot of optimism to someone that is looking to invest in a company. Due to this, it is also common to apply some form of multiple on reasonable projections for the company moving forward.

No matter what you are planning to do with your business, knowing the true value of it is very important. While it can seem like a rather complicated process, it can be achieved if you follow these three tips and processes. It is also possible that you may need to use multiple different forms of analysis and business valuation assessments to come up with the fair value.

If you have any questions about determining the value of you business, please feel free to contact us.
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About MPact Ventures

michael palomo | Mpact Ventures
Michael Palomo, the founder of MPact Ventures in McAllen, Texas, is an investor who focuses on solving the tough problems facing business owners, such as improving cash flow and becoming more efficient & cost effective, so they are successfully able to grow their business, get off the ‘cash flow rollercoaster’ and create a more stable way of life for themselves and their loved ones.

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