How much is your business worth?

The definition of fair market value is a business is worth what a willing buyer is willing to pay. Too many people believe that their business is worth more than it is. Unlike a house, you cannot compare your business to the one down the street. No two businesses are identical. Even franchises are different, one location has more sales, more profits therefore the valuation will be different for each separate business. All you can go by is ask a reasonable amount based on the valuation methods traditionally used in the marketplace.

A business is not worth more because you have a client who an exceptional client however if the sales are only $10,000 per annum, it is not a big account. Your company is not worth a premium because you have a premium client but does not generate a lot of sales. Yes, they may buy more in the future but you are selling the business based on what it did in the past and not what the new investor can do in the future.

Some businesses have huge cash flow however their financial statements may show little profit. Why – the company has significant assets which are being depreciated annually The assets were purchased in prior years but the amortization reduces the profits of the company. Banks look at the cash flow the business and can see that it is positive however they still look at retained earnings and if depreciation reduces retained earnings, the banks factor that into the borrowing ability of the business. The banker may say that they look at cash flow only but if you find out about their lending model, it is based on the balance sheet and the income statement, not just the income statement.

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