Protecting your business: What is it worth?

Knowing the value of your business will help you understand how it fits into your personal statement of financial purpose. Regularly updating the estimated value of your business can also help you identify new opportunities or risks as external factors in your marketplace change. There are various ways to think about valuing a business, and I always say a business is ultimately worth what someone is willing to pay for it, but here are some good starting points:

• Asset approach: This is relatively easy to calculate and would typically be a starting point for a business with substantial amount of fixed assets.
• Income approach: This method considers income potential. Depending on the type of business (e.g. service vs. manufacturing) one method may make more sense than another:
• -- Capitalization of earnings method - Usually for business with few or no tangible assets.
• -- Excess of earnings method - Often best for manufacturing-based firms with significant assets.
• -- Discounted cash flow method - Can be used for many types of business. Often used in mergers and acquisitions.
• -- Multiple of discretionary earnings method - This method accounts for Goodwill of the owner(s), so a strong brand/position in the marketplace may call for using this method.
• -- Market approach - Benchmark your business by looking at recent sales of other similar businesses. The same or related industry is helpful, but other key factors can play a role as well (e.g. revenue, employees, end customer profile, synergy with acquiring firm, etc.)

Important Action Item: Consider the following – What is the value of your business today? If you have not updated this number recently, which method do you think may make the most sense to implement to refresh your estimate? Once you have updated the estimated value, what new opportunities or risk come to mind that you may need to address?