1. The asset method The most straightforward method of evaluating fair market value, the asset method calculates value by subtracting liabilities from assets. For example, if your business has $200,000 in assets and $50,000 in liabilities, its total value is $150,000. Worth noting? The asset method effectively provides a point-in-time ballpark of business value. It doesn’t take into consideration the ongoing nature of a profitable going-concern business, which has plans for continued, profitable operations that directly increase its value. 2. The income method The income method is more complex. It requires calculating your business’ potential future economic benefit, adjusting for factors such as growth rates and cost structures, and then working backward to create current value. While it may provide a more precise representation of market value, it depends on
value ($250,000 x 2.0) to get an average market value of $500,000. Equipped with a general idea of business value, you can make the first of many decisions regarding your legacy: Is it time to sell, or is it worth reducing debt and increasing valuation to boost your business value? Step 2: Choosing your successor What happens after your business is sold? Who takes over the reins and why? Would you prefer to sell your business to a family member? An interested party with business savvy? A private equity firm? Each approach comes with pros and cons—which one works best for you depends on your financial and familial goals. Option 1: Selling to a family member If you have family members interested in running your business or have plans to keep the business under the auspices of your family at large, you may consider selling to a family member. This could be an adult child, a sibling, a niece or nephew, or even a cousin— what’s more important than their relationship to you is their willingness and ability to manage the business. For instance, if they’ve already been working with you and have demonstrated substantial business savvy, it may make sense to have them transition into your role over time. If they have other interests but you want the business to remain in the family, you may want to transfer ownership (with or without a sale), without transferring specific roles or responsibilities. Option 2: Selling to an interested party You may also choose to sell your business to an interested party. This could be a current employee or group of employees who plan to continue running the business as-is, or it could be a buyer looking to capitalize on your positive cash flow. Option 3: Selling to a private-equity or investment firm There’s also the possibility of selling your business to a private-equity or investment firm. In this case, your business may be repurposed as part of a larger investment strategy. Or it may be closed after the purchase if it directly competes with another company owned by the equity or investment firm.
accurate forecasting assumptions and is best attempted with the help of a financial professional. 3. The market method The market method is designed to be quick and easy, but it also provides a more accurate valuation than the asset method. As noted by Forbes,
With a general idea of business value, you can make the first of many decisions regarding your legacy: Is it time to sell, or is it worth reducing debt and increasing valuation to boost your business value?
it relies on current market data about the average sale
price of cash-flowing businesses in comparison to the seller’s discretionary earnings (SDE). SDE is calculated by combining the net profit on your profit and loss statement with any personal expenses, such as the purchase of health or auto insurance paid for using business funds, along with any salary you pay yourself. Here’s an example: Say your business has a net profit of $150,000 per year. You pay yourself a salary of $60,000 and spend $40,000 on documented personal and family expenses. The result is an SDE of $250,000. If the average market multiple for SDE in your area for similar businesses is 2.0, you multiply your SDE by this
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IN YOUR CORNER ISSUE 13 | 2023
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