Whether you’re selling a business, buying a business, want to figure out how much to pay a new partner, or like to stay informed, business appraisals and valuation are vital skills for any business owner. There are several different valuation methods, and all of them could be useful for various reasons. That being said, it can be detrimental to your interests if you choose the wrong one. Learn about the best ones for your individual goals so that you’re prepared to use one in the appropriate situation.

4 Valuation Methods Business Owners Should Know

1. Market-Based

If there are other businesses of similar size in the same industry that have already been sold, it will give you an idea of what your business might be worth. In other words, you’re comparing the market value of your business to another’s, as shared in a public database. This business appraisal method doesn’t work well for sole proprietorships, but most other companies may find it useful as a starting point in the valuation process.

2. Asset-Based

There are two main ways to conduct business appraisals focused on your company’s total asset value. One is called “going concern,” which calculates your business’s value by subtracting the worth of your liabilities from your assets. Use this method if you plan to continue your business. However, if your business is closing, apply the “liquidation approach,” which figures out what cash would be left over after selling your assets and paying off your liabilities.

3. ROI-Based

You’ll use this type of business appraisal if you’re seeking investors. Ask yourself what percentage of your company you’d be willing to exchange for a predetermined amount of money. Divide that amount by the percentage, and you’ll get the value you’ve set for your business. An investor will decide whether they think that number is realistic and will promise a return on their investment with a comparatively respectable profit afterward.

4. Earnings-Based

For stable businesses with consistent cash flow, the “capitalization of earnings” method makes sense, since it determines the business’s value from the assumption that it will continue growing and generating profit at its current rate. However, the “multiple of earnings” or “times revenue” method calculates a business’s worth by multiplying its current revenue by a rate of growth that would be reasonable for its industry. Then there’s the “discounted cash flow” approach, which compares the value of a business’s projected cash flow to its current one to get an idea of its overall value.

No matter what kind of business appraisals you need, Zoellner Garten & Company of Cincinnati, OH can use their two decades worth of extensive knowledge and nationwide contacts to help. If you want to learn more about valuation methods because you’re considering buying or selling a business, or looking to refine your business planning techniques, they’re glad to offer their experience and step-by-step guidance so that you can generate the highest profit possible. Contact them for advice today by calling (513) 852-2400 or reaching out online.