How is the value of a business determined?
Many lengthy and ponderous tomes have been written to answer the question of how the value of a business is determined, but ultimately value depends on cash flow, either today or in the future. Determining what that cash flow ought to be is one of the prime objectives of the professional valuator.
3. How would we determine the value of my “sweat equity,” which is 10 years of work and many sleepless nights? I want to purchase the business because the potential for growth is phenomenal. Sounds like you have a great opportunity to own and operate a business that you know very well. Your challenge is coming up with a selling price and financing package that works well for both of you. To do this, youll need to hire outside advisers. The only way to come up with a fair valuation is to hire a business broker or appraiser who is familiar with your industry. The fee youll pay for their time and a written report will be money well spent. While they are appraising the business in terms of real estate, assets and revenues, you and your accountant should be taking a close look at all financial records, including long- and short-term debts and overhead expenses. Youll also need to know how much it costs to run the company including rent, insurance (for employees and equipment), and a detaile
Making the connection between the recorded profit and the value of the business is not an easy matter. The court said that the plaintiff paid too much. And what is “too much”? Logically, “too much” would be any amount in excess of the true value of the business. But what is the true value of a business, and how is it impacted by the profit and loss statement? These questions were addressed indirectly in the Bizane judgement. What is the value of a business? To the casual observer, the value of a business may appear to be the ‘net assets’, or its assets minus any liabilities. While such an analysis may be adequate to determine the ‘book value’ of the business, it is usually not adequate to assess what a third party would pay to acquire the business. For example, merely looking at the balance sheet may overlook many intangible assets such as the client base, the quality of staff, the calibre of the leadership team or the synergies to be gained post-acquisition. For most businesses, the v
