Finding Your Company’s Worth

Business Valuation is the process of determining the economic value of a business or company. Although this may seem pretty straightforward, accurately valuing each business takes a great amount of preparation and thought. Establishing what a business is worth is not an exact science, largely due to the way different people view each aspect of a company. An investor will likely base their assessment of the Startup Stock Photosbusiness value solely on how much money the company brings in, while the owner may heavily value its connection to the community it serves. Beyond the possible differences in opinion, economic conditions affect what people believe a business is worth. As job scarcity increases, the number of business buyers in the market follows and that increased competition results in higher selling prices.  Also, low interest rates spur investors to put their money into businesses rather than banks, because returns are so much higher.

When it comes to business valuation, there are three umbrella terms for methods used. Each of the following represents a choice of several methods all grouped into the same approach.

Asset approach: The asset approach views the business as a set of assets and liabilities that are weighed against one another to determine business value. The asset approach is based on substitution by answering this question: What would it cost to create an identical business that will produce equal economic benefit for its owners?   Although this may seem like a fairly simple equation, there are many important details than cannot be overlooked, including which assets and liabilities should be considered, what standard to use to measure their value, and how to set each individual item’s worth.

Market approach:  As one could assume from its name, the market approach relies on signals from the market place to determine what a business is worth.  The market approach applies the principle of competition, asking “What are businesses worth that are comparable to my business?” In assessing the value of a company using the market approach, the fair market value-a value which buyers are willing to pay and sellers are willing to accept-is found by searching the market for the current business price equilibrium. The market approach is commonly used as a way to substantiate one’s offer or asking price. If you determine the “going rate” is a certain amount, why offer any more or accept any less?

Income Approach:  This approach focuses in on a company’s core motivation for existing: profit. It attempts to answer the question “If I invest time, money, and effort into owning this business, what economic benefits will it provide me, and when?”  The income valuation approach centers around a future expectation of economic benefit while also factoring in the risk of the money not being brought in on time – or at all.   This is probably the most common in the Customs brokerage and/or freight forwarding fields, as the companies tend not to be asset based, and market valuations are difficult among closely held businesses which don’t publicly report sales, income, or private sale prices.

With three different approaches, business valuation methods often produce different results.  When deciding which assessment style best fits your needs, it is important to consider the size and age of the business in question, as well as whether what you’re valuing is a start-up or already a cash cow. Although you may find a particular method best geared towards your company (i.e. the income approach with a brand new company that has yet to bring in much profit) it is important to keep in mind that all of the approaches listed above are reliable methods which can be successfully applied to a business of any kind.

Contact us anytime if you have any questions about this topic or would like to speak with a member of our experienced legal team.  In the past year we have performed valuations of roughly a half-dozen logistics firms.  Contact Us

 

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