How to Value Your Business Before Selling in California

Are you thinking of selling your California business? Whatever the reason for considering this major milestone, one of the first and most vital steps is determining what your business is worth. Business valuation can play a significant role in shaping the transaction and your future financial plans. But determining the value of your business is not just about assigning a number to it. It is about understanding its financial health, market position, and future potential. In this article, we discuss how to value your California business before selling.

What is the Importance of Business Valuation Before Selling?

Business valuation can be a lengthy and complex process. This might lead you to wonder, “Do I really need a business valuation before selling?” The simple answer, yes, you do. Do not come up with a rough estimate of your company’s value. This might result in an overestimation or underestimation of your business. A business valuation can ensure an accurate assessment of your business’s current worth.

A business valuation can help in several ways, including;

• Preventing you from underselling your business
• Preventing you from overpricing your business and scaring away potential buyers
• Building credibility and trust during negotiations

Regardless of the type of business you are selling or how long it has been in operation, knowing your business’s value is vital.

Common Business Valuation Methods

There is no one-size-fits-all method for valuing businesses in California. The best valuation method for you will depend on your business type and situation. That said, here are some of the most commonly used business valuation methods in California;

1.  Asset-Based Valuation

This method focuses on determining the net value of your company’s assets. It looks at what you own versus what you owe. The asset-based valuation method adds up all your tangible assets, such as equipment and property, and intangible assets, such as goodwill or trademarks, and then subtracts your liabilities. This method is commonly used by businesses with significant physical assets. If intellectual property or other intangible assets play a large role in your business, this method might undervalue your company’s true worth. To prevent this, you will need to account more adequately for intangible assets.

2.  Income-Based Valuation

The income-based valuation approach values a business based on its ability to generate future earnings. This approach has two main methods;

• Capitalization of Earnings Method: Calculates the net present value of expected future profits or cash flow by taking the business’s future earnings and dividing them by the required rate of return.
• Discounted Cash Flow (DCF): This method projects future cash flows over several years and then discounts them back to today’s value using a risk-adjusted rate.

3.  Market-Based Valuation

This method involves comparing your business to other similar ones that have recently sold. This approach can be helpful for determining market-based pricing expectations. However, a common challenge with this approach is the availability of up-to-date data. 

Can You Perform Your Own Valuation?

You might be considering performing your own valuation so you can save money by avoiding paying an accountant, CPA, or business appraiser. However, valuing a business is complex. Handling this process alone can result in an inaccurate value. Working with a professional can ensure you get a fair and accurate valuation that you can easily defend during negotiations.

Contact Us for Legal Help

If you are considering selling your California business, contact our experienced business attorneys at SAC Attorneys LLP for legal guidance.