Determining the value of your business is essential. We’ve addressed five key reasons to get your business appraised elsewhere in Bridge’s learning center, and if you’re prepping an exit strategy, check out our Top 4 Exit Strategies for Business Owners. 98% of business owners don’t know what they’re worth, and some may not be aware of hidden complexities in the process.  That’s why it pays to consult a team of professionals, like ours at Bridge.

Determine Your Business Worth and Value

Let’s go over four broad approaches for appraising a business. Each has its benefits, and it’s vital to tailor the approach to the business’s unique context. Looking for more detail? Check out our Business Valuation Methods Overview (coming soon)!

The Future Earnings Approach

This method looks at how much money a business is expected to make in the future. It then uses a rate to figure out the value of the business. The Future Earnings Method treats all business assets with equal importance.

Who Should Use It

• Startups and High-Growth Companies: Businesses with strong growth potential and future profitability projections benefit from this approach. It is ideal for companies in emerging industries or those with innovative products and services that are expected to capture significant market share.
• Investors and Venture Capitalists: Those looking to invest in businesses with high growth potential often rely on this method to assess future returns.

Why It’s Useful:

• It helps in understanding the long-term value of a business based on expected growth.
• It provides a forward-looking perspective, focusing on potential earnings rather than current or past performance.

The Asset-Based Approach

This form of appraisal prioritizes the worth of the company’s physical assets, such as equipment, over how much money the business makes. This is a great approach for businesses with valuable items on its balance sheet.

Who Should Use It

• Asset-Intensive Businesses: Companies with substantial physical or tangible assets, such as manufacturing firms, real estate companies, or those with significant equipment, should consider this approach.
• Businesses Facing Liquidation: Companies that are winding down operations or restructuring may use this method to determine the liquidation value of their assets.

Why It’s Useful:

• It provides a clear picture of the company’s net asset value, which is crucial for businesses where assets play a significant role in their valuation.
• It is straightforward and focuses on the tangible worth of the business.

The Income-Based Approach

This approach considers how much money the business makes in the long run, using tools like discounted cash flow analysis. It helps business owners understand how much money the company might make in the future.

Who Should Use It

• Established Businesses with Stable Cash Flows: Companies with a history of consistent earnings and predictable cash flows, such as utility companies or mature service providers, benefit from this approach.
• Investors Seeking Reliable Returns: Those interested in businesses with steady income streams often use this method to evaluate potential investments.

Why It’s Useful:

• It provides a comprehensive view of the business’s ability to generate income over time, which is crucial for assessing long-term profitability.
• It helps in understanding the intrinsic value of a business based on its earnings potential.

The Market-Based Approach

This method compares the business to other companies, using market trends to estimate its worth. When conducting a market-based valuation, companies are usually compared within the same industry.

Who Should Use It

• Businesses in Competitive Industries: Companies operating in sectors with active buying and selling markets, such as retail or technology, can benefit from this approach.
• Owners Considering a Sale: Business owners looking to sell their company can use this method to benchmark their business against similar companies in the market.

Why It’s Useful:

• It provides a relative valuation by comparing the business to others in the same industry, offering insights into market positioning.
• It helps in understanding how the business is valued in the context of current market conditions.

Each method has subtleties involved. That’s why some businesses mix and match approaches to overcome the drawbacks of any one method. Here at Bridge, we offer certified valuations so you can be confident you have an accurate picture of our business. Get a valuation today!