How to Value Your Business - Part Two

Ok, so we've talked a bit about "fair market value" versus "strategic value", and you understand that "strategic value (what it's worth to you)" is usually higher than "fair market value (what it's worth to Mr. Smith)".

The investment world is driven by "Fair Market Value" - let's call this FMV to make it easier from here on. And, let's call Strategic Value "SV", although I'd prefer "SRV" as I'm a Stevie Ray Vaughan fan but we can go with SV.

There are three (3) basic valuation models. Not two, and not four - there are only three.

First is the cash flow model - either historical cash flows or anticipated future cash flows are used to determine a value of the business. There is a lot more to this model that we'll discover in future posts, but for now just understand that a company is worth what it's cash flows are.

Second, we can look to what other similar companies have sold for. This is like the appraisal you get on your personal residence - we look at sales of businesses similar to yours. Again, there are a lot of caveats here.

Third, we can look at what the assets of the company are worth, including intangible assets such as brand recognition, goodwill, etc. This is the easiest of the methods to understand, but one of the hardest methods to apply. More on that later....

If you're ready to value your business, please feel free to contact me, I'll be glad to explain the process to you and help you value your business.

B. Dane Byers, CPA, ABV, CFF
Bassett & Byers, P.A.
Partner
3701 Lake Boone Trail, Ste 201
Raleigh, NC 27607
(919) 303-1049
dbyers@bassettcpas.com