Business Valuation Key Terms
Stay on top of the right business valuation terms to determine your company's worth
If you are getting ready to sell your business or if you just want to determine its economic value, then it’s time to get a business valuation from a certified professional. There are different methods to use in determining your company’s worth, but not all of them are suitable for every type of company. Becoming well-versed in business valuation key terms will ensure that you aren’t in the dark when it comes to putting a price tag on your company.
Business valuation
Business valuation is the act of determining the value of your business. There are different reasons why you may want to do this, such as if you're getting ready to sell or if you're looking to insure it.
Try: SCORE has a clear explanation of business valuation, as well as real-world examples and some common myths regarding valuation.
Economic value
Economic value is the maximum amount that buyers are willing to give up. It helps to determine the value of your business because if people really don't want your product or service it has low economic value and therefore it won't be worth much.
Try: Ecosystemvaluation.org is a great resource to learn what economic value is and why it is so important for businesses.
Market value
How does your company compare with similar companies in your area? When you gather this information along with things like industry forecasts, you are on your way to determining the market value of your business. It is a way of figuring out what your business is worth based on factors other than its sales.
Try: Check out ValuAdder to get some ideas about the factors you should consider when you try to determine the market value of your business. The helpful valuation tool will even do the heavy lifting for you.
Economic outlook
Will your business survive a recession? Is your industry as a whole losing business due to overseas competition? Can you get a loan with a low interest rate? These are all important factors when doing a business valuation. If you are in an industry hit hard by a recession, chances are your business will not be worth as much as it used to be. It is important to forecast what the economy will be like down the road before placing a value on your company.
Try: Kiplinger has up-to-date economic outlook information for you to consider when doing a business valuation.
Valuation methods
There are many different valuation methods to use, such as the book value method, which is how much equity an owner has in the company, or the discounted cash flow method, which is where a company forecasts its future cash flow and then figures out what those amounts would equal in today's dollars, keeping in mind inflation and interest earnings.
Try: This list on VentureLine contains comprehensive explanations of the different business-valuation methods.
Professional certifications
There are many do-it-yourself solutions so business owners can value their business themselves. But there is no substitute for a business valuator who has the professional certifications to go along with the specialized education. These certifications mean that they are serious about the task and are up-to-date on laws to ensure you are getting the best price.
Try: This list of the available professional certifications for valuators at the Institute of Business Appraisers is a good place to start when you are looking into the qualifications of a business valuator.
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