Is Your Small Business Valuable?
Who Wants to Know?
Yes, you think you have value in your business but how do you determine what that value is? Most small businessmen are far too busy trying to gain just a little more profit from the business than they are about the value of the business. Then there comes the day when there is a pending divorce, a death in the family, the IRS sends you that dreaded letter, you decide to retire, or a myriad of other reasons and you need a business valuation.
Businesses cannot be valued the same as real estate or personal property is valued. Real estate and personal property is appraised by comparison to comparable sales in he same area, expert opinions of market value and other means. However, businesses cannot be done due to a rather vaporous feature called goodwill. This is a figure that is considered to be the profits a business would generate in excess of reasonable salaries to the owner(s) and a reasonable return on capital investment. (In many cases today, fringe benefits such as health and life insurance also must be considered.)
Business sales and breakups are the most prevalent cases of business valuation today, with divorces and tax problems not far behind. Few people have used a computerized business valuation program as a planning tool for future profit planning rather than a liquidating process.
So, let’s presume that you have the computer program in your PC and you are ready to start. You first enter your financial figures a specially designed questionnaire. The computer then computes the estimated value of your enterprise. It will be easy to see, then, what affects the goodwill factor in your business.
Business brokers have their own methods of figuring business values but many times their estimates are not used because the owner of the business thinks that his baby is much more valuable than it really is. He just will not believe the broker. Of course, there is always the problems that the broker is too high, also because he gets paid on a percentage basis and the wants the potential sale to yield as much as he can get. He’s a businessman, also. But it is nice to be able to double-check.
Now, once you understand the effects different figures have on the value of your business you can go back and change things here and there to adjust the predicted outcome. You have actually created what the big boys call a computer model. Wasn’t it fun?
This computer program offered by www.Lawleybooks.com.
Submitted by Duard Lawley, CPA(RT)
Lawley Publishing Co.
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