Tips for placing a value on your business
There are several reasons why you should know the value of your business. if you are planning to sell your business, the general rule is that you should sell it for fair market value. In many instances the term "fair market value" is somewhat ambiguous. In the simplest sense, fair market value is what a willing buyer would pay a willing seller, with each party knowing all the pertinent facts.
There are several acceptable methods for determining the fair market value of a company. The most common three methods use (1) the value of the company's assets, (2) the earning power of the company, or (3) the stock value, assuming the company is a corporation. When determining the value of the corporation's stock, you must research the sale of stock for a substantially similar business. If you have been operating the company for many years, you have built up a reputation for providing good service. This goodwill is a valuable asset and should play an important role in determining a fair asking price for your business.
The fair market value of the business is also relevant if you plan to transfer the company to a family member. If the transfer is for less than fair market value, the IRS considers the transaction as part sale and part gift. Inter-family transfers are more closely scrutinized, making an accurate valuation even more important.