Analysing the value of any business is important for different reasons like the expansion of the business, making partnership contracts, for audit purpose or during legal disputes. The importance of valuing a business is very crucial to the management and also the business to successfully continue for a long time in the industry.
The valuation needs to be accurate and also based on actual data and facts, The person conducting the process should be well knowing the operations of the business and also should be able to work in unity with the company in all respects.
Looking closely at the process of selling a business, there are two important factors and methods to be considered for the same and these are well judged by a broker in the business selling function. He will be capable of getting the deal fixed at convenient terms.
The two methods are :
- Seller discretionary earnings: this method uses the value of real numbers. It is simply the actual cash flow to the owner of a business.it figures out the difference between the figures like expenses of the owner in the business and the noncash expenses like depreciation are added back and amortization is calculated to arrive at the current worth of the business.
Then the sum total will be multiplied by the multiplier which is between 2 to 4.then the total valuation will be the times of SDE the multiple.
This finding helps to analyze the selling decision in a better way. The entire idea of this method is to arrive at the real worth of the business.
- Market comparison analysis: the broader view to finding out the values with respect to the market values of a similar business in another way to find the selling capacity of the business. It is different procedure based on the industry. It is unique for manufacturing industry and for an online selling business.
Business selling in a booming industry is profitable than the one in declining side. And the business with heavy equipment valued at a different rate than the ones with simple equipment. Many factors contribute to such decisions. Thus a broker will refer to a trade journal or other resource to find out what the average in a particular category will be selling for.