How to Value a Closely Held Business

If you are considering selling your closely held business, one of the most important steps in the process is determining its value. Knowing how to value a closely held business can help you set a fair price for your business, attract the right buyers, and ensure a successful sale.

In this article, we will walk you through the steps involved in valuing a closely held business.

Understanding the Basics of Business Valuation

Before we dive into the specifics of how to value a closely held business, it is important to understand the basics of business valuation. Business valuation is the process of determining the economic value of a business. Valuation is important in a variety of contexts, including mergers and acquisitions, financing, and legal disputes.

There are several methods used to value a business, including the income approach, the market approach, and the asset approach. The income approach is based on the expected future earnings of the business, while the market approach looks at the prices of comparable businesses in the market. The asset approach values a business based on the value of its assets, both tangible and intangible.

Factors That Affect Business Valuation

Several factors can affect the value of a closely held business, including financial performance, growth potential, industry trends, competition, and market conditions. Financial performance is often the most important factor in business valuation, as it provides a clear picture of the business’s current and future earning potential.

Other factors that can impact business valuation include the size and complexity of the business, the quality of its management team, the strength of its customer base, and its intellectual property and other intangible assets. It is important to consider all of these factors when valuing a closely held business.

Common Valuation Methods for Closely Held Businesses

When it comes to valuing closely held businesses, there are several methods that are commonly used. These include the income approach, the market approach, and the asset approach. Each of these methods has its own strengths and weaknesses, and the best approach will depend on the specific circumstances of the business.

Income Approach

The income approach is often used to value closely held businesses because it takes into account the earning potential of the business. The income approach involves estimating the future cash flows of the business and discounting them to their present value. This method requires a thorough understanding of the business’s financial performance and growth potential.

Market Approach

The market approach looks at the prices of comparable businesses in the market to determine the value of the closely held business. This method requires a good understanding of the industry and the market conditions. The market approach can be more challenging for closely held businesses, as there may not be many comparable businesses in the market.

Asset Approach

The asset approach values a business based on the value of its assets, both tangible and intangible. This method is often used for businesses that have significant tangible assets, such as real estate or equipment. The asset approach can be less useful for businesses that rely on intangible assets, such as intellectual property or brand recognition.

Getting Professional Help with Business Valuation

Valuing a closely held business can be a complex and time-consuming process. It is important to work with professionals who have experience in business valuation to ensure an accurate and fair valuation. At HedgeStone Business Advisors, we offer a comprehensive approach to business valuation and sales.

Our team of trusted experts includes in-house attorneys, accountants, and marketers with over 150 combined years of business sales experience. We have a successful track record of facilitating over $4 billion in business mergers and acquisitions, and we have experience with businesses of all sizes and industries.

HedgeStone’s expertise in business valuation includes a thorough understanding of the factors that impact business value, such as financial performance, growth potential, industry trends, and market conditions. Our team uses a variety of valuation methods, including the income approach, market approach, and asset approach, to provide our clients with an accurate and comprehensive valuation.

We also understand the challenges of selling a closely held business and work closely with our clients to develop a customized approach that meets their specific needs. Our mission at HedgeStone is to help our clients sell their businesses quickly and for top dollar, and we are committed to providing the highest level of service and expertise throughout the sales process.

Steps for Valuing a Closely Held Business

Now that we have covered the basics of business valuation and the common methods used to value closely held businesses, let’s dive into the specific steps involved in valuing a closely held business.

Step 1: Gather Financial Information

The first step in valuing a closely held business is to gather all relevant financial information. This includes financial statements, tax returns, cash flow projections, and any other financial documents that provide insight into the business’s financial performance.

Step 2: Determine Adjusted Earnings

Once you have gathered all of the financial information, the next step is to determine the business’s adjusted earnings. Adjusted earnings take into account any one-time or non-recurring expenses, as well as any other adjustments that may impact the business’s earnings.

Step 3: Choose a Valuation Method

After determining the business’s adjusted earnings, the next step is to choose a valuation method. As we discussed earlier, the three most common valuation methods for closely held businesses are the income approach, the market approach, and the asset approach.

Step 4: Apply the Chosen Valuation Method

Once you have chosen a valuation method, the next step is to apply it to the business. This will involve using the relevant financial information to calculate the business’s value based on the chosen method.

Step 5: Review and Adjust

After applying the chosen valuation method, the next step is to review and adjust the valuation as necessary. This may involve making adjustments based on industry trends, market conditions, or other factors that may impact the business’s value.

Step 6: Obtain a Professional Valuation

Finally, it is important to obtain a professional valuation from a qualified business valuation expert. A professional valuation can provide an objective and accurate assessment of the business’s value, which can be useful in negotiations with potential buyers.

Conclusion

Valuing a closely held business is an important step in the sales process. By understanding the basics of business valuation and the common methods used to value closely held businesses, you can ensure that you set a fair price for your business and attract the right buyers. Working with professionals like HedgeStone Business Advisors can help ensure an accurate and comprehensive valuation, and a successful sale.

Call us today at (561) 593-3711 for a free consultation and to learn more about how we can help you sell your business quickly and for top dollar.