The buying and selling of companies is similar to the real estate market.  Some investors are willing to purchase a fixer-upper that they can later flip for a profit, while others may be looking for a business that is already strong and ready to grow.  Regardless, the buyer is looking to make money just as much as the seller, and knowing the true worth of a company can ease the process of the sale.  An owner who is asking too much for a company that needs work will be just as disappointed as an owner who sells a goldmine for much less than it can produce.

Appraising A Business

Companies need a substantiation of value that is honest and factual, so that the seller can understand how to properly negotiate a sale, and so that the buyer can comfortably attain the new business.  In order to assess the value, the business owner should be familiar with the methods that are used to make this determination.  Key factors of worth include:

• •          Asset values
• •          Recalculations of earnings
• •          Cash flow
• •          Projected growth

These factors are then considered in concert with one another to make the final determination.

IRS Considerations

Many owners will defer to an appraiser if they do not have an experienced accountant on staff.  Some smaller businesses that still turn a good profit and have sound market position may still utilize a basic bookkeeping system and not have the necessary knowledge to make a true appraisal.  The IRS often suggests that several methods of value assessment be used when a business is being sold, as this will ensure that all parties are able to see a fair value for the company.  All of the methods are considered to be accurate, even though they may result in slight variance of value, so using multiple assessments helps to address as many factors as possible.

Business Appraisal

The most common methods used to figure out what a company is worth include:

• •          Net worth method – This is the book value, but not always the fair market value.
• •          Underlying Value Of Assets – This includes assets as based on current market price.
• •          Capitalization Of Earnings – This takes into consideration past and projected earnings.
• •          Price Earnings Multiplier – This looks at the value of publicly traded stocks.
• •          Discounts – This considers devaluation potentials.
• •          Goodwill – This considers projected value as based on consumer loyalties.
• •          Weighting – This places emphasis on one or more of the factors used in evaluation.

By using two or more of these methods, the seller and the buyer can be confident that a fair value for the business has been determined.