Valuing Your Business: How Business Brokers Determine Worth

Valuing Your Business: How Business Brokers Determine Worth

When the decision has been made to sell your business, the next step is perhaps the most crucial of all: determining the value of your business. There are several ways this can be done, but it isn’t an exact science. For that reason, it is essential that you seek out a trained broker to help you determine how much your business is worth.

But don’t expect that broker to tell you everything you want to hear. Their job is to be honest and straightforward. This is to help facilitate the easiest and most profitable outcome for you. And sometimes that may mean hearing some hard truths. For instance, you may find that current market conditions mean your business isn’t worth quite what you thought it would be. It can happen. Afterall, valuing your business doesn't take in the years of work that you’ve put into it. 

No matter what the value of your business turns out to be, an established broker, like the ones at Transworld, can help you find ways to improve your business to expediate its sale and provide realistic advice and information about how the sale will go. It’s important to remember that you might not hear the number you want from a broker.

Common valuation approaches

What are the most common ways that brokers determine the value of your business? Here are the top approaches:

  • Comparing similar businesses in your category and focusing on the business’s specific industry and how it values companies—a market approach.
  • Projecting the future earnings of your business and calculating the present value of those earnings or applying a capitalization rate—an income approach
  • Calculating the business’s net asset value—an asset approach

Understanding valuation factors

Not everyone is well versed in the language of business evaluation. Understanding some of the basic terminology can help you when you start the process of determining your business’s value.

To start, tangible assets are assets that have physical substance such as inventory, a building, rolling stock, manufacturing equipment or machinery, and office furniture. The flip side of that, intangible assets include patents, copyright, franchises, goodwill, trademarks, and trade names, as well as any form of digital asset such as software, i.e., things that lack physical substance.

Then there are liabilities. These are the things your company owes like payments to suppliers, salaries and wages, payroll taxes and loans. The measures of a business’s health and performance such as profits, revenue, expenses or other financial outcomes are the financial metrics.

Finally, business owners need to consider that not all trends are specific to profit. From inflation to recession to the availability of capital, the larger macroeconomics can play a role in what your business will be valued. Even something like the current state of supply and demand plays a part.

Benefits of valuing your business

Even if you aren’t ready to sell, there are many values to knowing the true value of your company.

  • Helps you plan for retirement and your exit strategy of how to leave your business.
  • Offers insight into how to improve your company
  • Guides you to the best options if you are seeking additional funding

At Transworld, we have years of experience selling businesses just like yours, and we can provide insight into how to accurately value your business. In fact, we’ve helped business owners sell more than 15,000 businesses, and we have 250-plus offices worldwide with more than 850 brokers. During our 40 years of experience, we have learned that it can on average nine months to sell your business, but larger deals may require up to a year. Our Business Advisors have the training and know-how to help ensure you get the best deal. Schedule a free consultation today to get started.