What is the Value of Your Business?
There seems to be no universal answer to this question. Instead, business owners need to ask themselves why they need to know the value – is it for estate purposes, lending purposes or are they perhaps thinking of bringing in new business partners? The answer will unfold accordingly.
The main reason behind being this vague is the fact that there are as many definitions of valuation as there are reasons to obtain one. For example, imagine a married couple that is getting divorced. If they have to split husband’s business in half, he will wish to value his business as low as possible, whereas the wife will do the opposite. You can clearly see that determining an objective value can be difficult.
A general definition of a business value goes along the lines of Fair Market Value, specifically: “The price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.”
This definition is commonly used in the Western world and it synonymises value with price. In fact, that is what most business owners or buyers alike want to know – how much money they can sell or buy for. Moreover, it seems to be rather vague about calculating the tangible value by specific methods and leaves the ultimate value up to both parties.
On the other hand, International Business Brokers Association defines price as: “The total of all consideration passed at any time between the buyer and the seller for an ownership interest in a business enterprise and may include, but is not limited to, all remuneration for tangible and intangible assets such as furniture, equipment, supplies, inventory, working capital, non-competition agreements, employment, and/or consultation agreements, licenses, customer lists, franchise fees, assumed liabilities, stock options or stock redemptions, real estate, leases, royalties, earn-outs, and future considerations.”
Unlike the previous definition, price is simple – what something is sold for. It is just the value that has to be decided on and eventually agreed by both sides. If you have a hard time determining the value of your business, getting a professional help from a business broker can be of a big help.