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How to Determine a Company's Market Value
by Devra Gartenstein
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Overview
Selling a business is an extremely subjective process because there are so many intangible factors that contribute to the worth of a business. In actuality, the value of a business is any amount that's mutually acceptable to both the buyer and seller. Fortunately, there are some reasonably objective benchmarks that you can use as a foundation for creating a price, before adjusting that amount relative to the intangibles the business provides, such as ease and quality of life.
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Step 1
Add the net profit from the previous two years of business activity, using the figure on your profit and loss statement. Adjust this amount for any variables that are unique to your personal ownership of the business, such as interest on business loans. Use the actual cost of operating your vehicle for business purposes, rather than the amount you claimed on your tax forms through the standard mileage deduction.
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Step 2
Calculate the value of the business's tangible assets, including equipment, fixtures, property and any vehicles that you include with the sale of the business. Determine the value of equipment by subtracting the percentage of its value that you have already taken in depreciation deductions on your previous years' tax forms. For example, if you chose a five-year basis for depreciating your computer and you have had it for three years, list it at 40 percent of the amount you paid for it because 40 percent of its depreciation period remains. If your equipment is fully depreciated, list it for 20 percent of what you paid for it. Add the value of the business assets to your net profit for the previous two years as the basis for your business's fair market value.
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Step 3
Adjust the total of your equipment and two years' net profit to reflect any other considerations that may contribute to the value of your business, tangible and intangible. If your business holds a long-term lease at a rent that is below market value for the area where it is located, raise the price accordingly. If you have clear manuals and written support materials for your business, add to the price to reflect this added value. If you have been in business a long time and have a solid reputation and a loyal clientele, this will add value to your business as well. Also adjust the price higher if your systems are good enough that your business can largely run itself.
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- Profit and loss statement
Business tax forms
- Profit and loss statement
- Business tax forms
