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Different valuation approaches for business owners

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Different valuation approaches for business owners

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Different valuation approaches for business owners

It is extremely crucial to get a business valued, and this especially applies to individuals who own business quite frequently. Often at times, it is done for a specific purpose which includes postsale retirement planning. Sometimes, however, it may be required due to estate tax planning (in this regard, you can also contact a tax expert Sarasota Fl) or for a financial statement. Whatever your reason is, there are a number of ways through which you can value a business. 



In this article, we describe all the common ways in which you can value your business. This article may also be a guide for CPA Sarasota Fl financial planners on having discussions with the owners of businesses regarding valuation. 


However, this article does not really describe the way to calculate your business value. That is best left to the professionals with a license. In this regard, consider finding an accountant Sarasota Fl to get your accounts sorted out first.


The starting point 


Before starting the valuation process, it is extremely important to figure out the net income of the business and the value of its assets. Sometimes, the net projected income may also be considered. 


In most of the cases, the very recent financial statement is the best starting point. The values of assets start with the book value and then the adjustments can be made for some assets that include machinery. These assets may be undervalued or overvalued based on their replacements costs. 

 

The valuation premise 


Usually, two premises are possible for valuation. Firstly, it is that a business will get liquidated or secondly, it is that it will continue to operate as an entity. For most of the valuations, liquidity is not considered especially if the business is profitable. Liquidity is usually considered when the assets the underutilized and have great values on their own, far more than the value of the business based on the earnings. This is something that should only be considered at the end of the valuation.  


Operating business income 


As far as the net income of the business is considered, it is quite crucial to make some adjustments that will normalize the earnings. Their earnings will be normalized based on normal operation. The normalized net income can be considered as a major aspect of any valuation process.  


The purpose of a valuation  


Often at times, valuation reports tend to be as long as 60 to 100 pages. This is especially true for official valuations. However, the valuation itself is based on opinions ultimately that themselves revolve around some assumptions and facts. At the same time, it is also possible that different values can be achieved that depend on the valuation’s purpose. Hence, the purpose of the valuation should be made very clear before beginning the process. 


At the same time, a divorce valuation has a different process as compared to executive compensation. Similarly, in case a partner wants to buyout upon death, a different method would be used. Yet another method will be used in case the same partner gets retired. 

 

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