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How to determine the value of a business

On Behalf of | Jul 23, 2020 | Business Law |

There are many different businesses in New Jersey. Some produce and sell various products and others may provide various services to people or businesses. Some of the businesses are very large with many employees and some are run by a single individual. Every business no matter their size or what they do has some kind of value though. However, business valuation is not as easy as determining the price of a certain product.

When the owners of a company are looking to sell their company, are looking to add investors or shareholders or may be going through a divorce, it is in important to know the value of the company though. To determine the value of a company there are a number of different methods that can be used.

Market Value Method

This method looks at what other similar businesses in the area have sold for recently to determine the value. This approach does not take into many unique factors of each business though and is not the most precise method of determining the value of a specific company.

Asset-Based Method

This method values the companies’ assets and subtracts the companies’ liabilities to determine the value of the business. This method can be used by using the fair-market value of the assets or the liquidation value of the assets depending on whether the company is going to continue or whether it is being liquidated.

Return on Investment Method

This method determines what an investor’s return on their investment would be. There are a number of factors that go into determining this, but generally the company would need to analyze their yearly profits and expectations for the future to determine how long it may take for an investor to start seeing a return on their initial investment among other factors.

There are other methods that companies can use as well, but most of them will analyze a companies’ profits and try to determine what to expect in the future based on what has occurred in the past. The method used will depend on the type of company and the purpose for the business valuation.

Many business owners in new Jersey may want to know the value of their business for various reasons. This can be a complicated process though and consulting with experienced attorneys may be beneficial.