Four Steps to Appraising Your Business’s Value
A sole proprietorship is a business that is usually owned and operated by the same person, with or without the help of a few employees. Because it is not publicly traded, it can be a challenge to determine how much the business is actually worth.
However, if there ever comes a time when you want to sell the business, then you will have to be able to come up with some type of number. Here are four steps that can help you to fairly determine the value of a sole proprietorship.
Step 1 – Evaluate the Business’s Assets
Because a sole proprietorship is owned and operated under the name of the owner, most of its assets will also be in the name of the owner. This can complicate matters, because often, the line between personal and business assets can be blurred.
In order to determine the value of the business’s assets, the owner will need to separate the business assets that he is planning on selling as part of the business, from his own personal assets.
The value of the business assets would then be decided based on how much the assets would cost if they were being purchased from a third-party.
Step 2 – Evaluate Income Potential
While the value of the business’s assets provides a good starting off point, it does not take into consideration the company’s income potential, or the value of its customer base and brand recognition. So what’s the challenge with this? The impact that the owner’s professional identity has on the value of the business generally tends to remain unknown.
Future income could be predicted by looking at the company’s annual income stream and growth, with a slight decline expected once the current owner is no longer a part of the business.
Step 3 – Evaluate Earnings Potential
Just because a business has a lot of sales every month does not automatically make it a profitable business. This is because its actual earnings can only be determined after taking into consideration the company’s expenses.
In addition, the type of business also determines earnings potential, as in cases where the sole proprietorship is a service-based company in which the owner is the primary provider of the service. This type of company normally has a list of clients that it provides services to.
In order to get a more realistic earnings valuation, you would have to determine how many clients would choose to stay or leave, in the event that the business has a new owner.
Step 4 – Composite Analysis
Some experts recommend taking a close look at similar businesses that have recently been sold, to help gauge the value of your sole proprietorship. After taking into consideration such things as brand recognition and other tangible valuation methods, an estimate can typically be produced.
The key to determining the value of a sole proprietorship is in the understanding that your valuation of the business is just an estimate. This is because so much of the company’s success rides on the personality and experience of the owner.
There is no rock-solid method you can use to appraise your company. In the end, the best you can do is to appraise it at a price point that the buyer will be willing to pay.