Almost all business owners inevitably find themselves facing the question of what their business might be worth. Perhaps you are considering a loan or a venture capital investment to expand your business’s impact, or you are evaluating whether to grant equity to a valued employee.
In many situations, conducting a proper valuation of your business can be an important first step to drafting contracts and other legal documents, including sales agreements.
Getting Your Business Properly Valued
While you can sometimes get a rough estimate of the value of your company by looking at annual revenues and yearly tax returns, these simplistic views don’t present a full picture of the worth of your business and its potential for growth.
Instead, it is often necessary to utilize an outside expert who can help you comprehensively value your business. Business valuation experts typically use one of three approaches to determine the value of your company:
- The Asset Approach: The asset approach looks at the assets and liabilities of the company to reach an overall calculation of value. This approach looks at typical assets and liabilities found on any balance sheet, such as real estate owned and outstanding loans, but also considers unique assets of the business that might not be easily quantifiable, such as the value of bringing a niche service to a market.
- The Income Approach: This approach looks at the current income of the business and expected future income, while also considering future risks. While this model considers income down the road, it translates that likelihood of future income into a present-day value for the business.
- The Market Approach: This third approach looks to the sale of other businesses to determine the value of your company, much like the real estate market works. The value of your business will depend, in part, on whether there are similar businesses out there, how the economy has valued them, and what the “going rate” may be at the time.
Preparing For a Business Valuation
Under any of the three business valuation approaches, it is important that you have as much documentation available as possible in order to assist an expert in valuing your company. Having your books in order is a fundamental first step to finding out the worth of your company. Prior to undertaking a valuation, you should undertake these fundamental steps:
- Make sure your balance sheets are up-to-date and reflect all income and liabilities
- Request and keep on file the last five years of your business tax returns
- Document and explain any unexpected windfalls or debts incurred
- Hold onto yearly payroll records
Consult With the Business Litigation Experts at Romano & Sumner, PLLC
At Romano & Sumner, PLLC, our business litigation attorneys have helped advise countless clients on their options for a business valuation, and we can help put you in touch with a Texas business valuation expert who can assist you. To discuss how best to find out your company’s worth, contact us online or at 281-242-0995.