Businesses change hands all the time – and buying an established business can be a dream come true for many would-be entrepreneurs. Whether you’re retiring or you just want to move on to a new project, there’s probably someone out there just waiting for your business to go up for sale.
You can’t sell your business, however, until you figure out what price you can get. The following are three possible approaches you can take when valuing a business in anticipation of a potential sale.
Income-based approach
If your business is asset-poor but produces steady revenue, this may be the most effective approach to take for valuation. This is often the approach used by online businesses, businesses that are still relatively new but with great growth potential and small businesses with a steady, predictable cash flow.
Asset-based approach
This approach is appropriate when you’re looking to liquidate, your business has a lot of assets but not a lot of profit or your business is largely asset-driven through investments or real estate holdings. If your company is heavy on tangible assets but light on income, asset-based valuation can provide a fair market value.
Market-based approach
Sometimes, you simply have to compare “apples to apples and oranges to oranges” to get a good value. The market-based approach takes a look at the business in a real-world context by anchoring the valuation to the worth of other, comparable companies and the market dynamics in your particular industry. This is the approach to take in a volatile industry or one that’s undergoing dramatic growth.
Selling a business takes a lot of planning, and seeking legal guidance can help make certain that you are negotiating with potential buyers from a position of strength.