This is “Valuing the Business”, chapter 11 from the book Creating Services and Products (v. 1.0).
This book is licensed under a Creative Commons by-nc-sa 3.0 license. See the license for more details, but that basically means you can share this book as long as you credit the author (but see below), don't make money from it, and do make it available to everyone else under the same terms.
This content was accessible as of December 29, 2012, and it was downloaded then by Andy Schmitz in an effort to preserve the availability of this book.
Normally, the author and publisher would be credited here. However, the publisher has asked for the customary Creative Commons attribution to the original publisher, authors, title, and book URI to be removed. Additionally, per the publisher's request, their name has been removed in some passages. More information is available on this project's attribution page.
For more information on the source of this book, or why it is available for free, please see the project's home page. You can browse or download additional books there. You may also download a PDF copy of this book (14 MB) or just this chapter (207 KB), suitable for printing or most e-readers, or a .zip file containing this book's HTML files (for use in a web browser offline).
Everyone is interested in how much a business is worth. The entrepreneur and the entrepreneur’s family are interested because they hope to use some of the income from the business to live on or because they are interested in how much they might sell the business for someday. Then, there is a simple curiosity factor: “I wonder what I could get for this?” If the entrepreneur seeks outside funding from friends, banks, angels, and venture capitalists (VCs), they will be very interested in the potential value of the firm. When a public company is being sold, its current trading price establishes a starting point—usually a minimum transaction price—but the acquiring company must still decide on the maximum bid consistent with a profitable acquisition. But when selling a nonpublic company, even that starting point does not exist. The field of business valuation has developed techniques designed to estimate the value of a business.This chapter is adapted from material originally appearing in Huefner, Largay, and Hamlen (2005 and 2007, Thomson Custom Publishing; used by permission of the copyright holders).
One author gives this thorough definition of business valuation:
A business valuation determines the estimated market value of a business entity. A thorough, robust valuation consists of an in-depth analysis by a qualified independent professional who combines (a) proven techniques; (b) analysis and understanding of a specific company and its associated industry; (c) research and analysis of industry, association, and other publications; academic studies; the national and local economy; and online databases with (d) judgment honed by education, training, and experience; and (e) intuition. A valuation estimates the complex economic benefits that arise from combining a group of physical assets with the intangible assets of the business enterprise as a going concern. The resulting valuation, part science and part art, is a well-founded estimate that represents the price that hypothetical informed buyers and sellers would negotiate at arms length for an entire business or for a partial equity interest.Jones and Van Dyke (1998).