Horton Business Group

Valuing Your Business

Most companies are sold as ongoing concerns. This means that they are profitable and are expected to be profitable in the future and not sold on the basis of assets but on a basis of their earning power. The value of these businesses is based on how much profit they expect to earn.

 Profit is defined as what is available to the owner. This may be cast into a net cash flow or  discretionary cash flow available to the owner.  If one uses net cash flow, using a rate of return or discount rate one can estimate value. If using discretionary cash flow then comparable business sales can be used to estimate value.

 The key is that value or sales price of the business is based on its cash flows. To demonstrate value or worth to the buyer, this supporting data needed for these estimates should be communicated.  To this end, detailed accurate financial statements are needed.