April 23, 2025 • Articles / Resources

Understanding the Fair Value of Your Business

Determining the fair value of your business is critical, whether for buying or selling. It gives you information to set expectations and confidently negotiate, ensuring you do not undersell or overpay.

Fair value considers multiple factors, including a financial analysis of your business’s assets, future growth potential, and liabilities, as well as current market conditions. Since market conditions are assessed, it is important to recognize that fair value is dynamic; therefore, timing does become a factor.

Key Financial Metrics

• EBITDA – calculating EBITDA serves as a valuable indicator of cash flow, especially for service-based businesses
• Cash Flow & Earnings – Are they stable and consistent?

Market Metrics

• When looking at your competitors, where does your business stand?
• Does one customer make up most of your revenue, or do you have a good mix of customers?
• Is your industry growing or declining?

Other Factors

• A strong, well-structured management team can enhance market value.
• Do you have defined and documented processes & systems in place?

Calculating Fair Value is both an Art and a Science

There are several methods for calculating Fair Value, and understanding which is right for your business is important to empower both business owners and buyers and/or investors to make informed decisions. The method selected depends on the business, industry, and valuation purpose. A combination of techniques may be appropriate.

Valuation Methods:

• Asset-Based Valuation — This method calculates net asset value by deducting total liabilities from total assets. It is typically useful for asset-heavy businesses, such as those in the manufacturing space.
• Income-Based Valuation—This method, sometimes called an earnings multiplier, focuses on a business’s ability to generate future earnings. Investors consider potential income in addition to current assets.
• Market-Based Valuation—This method compares a business to similar publicly traded companies or recent transactions involving comparable firms. It is most useful when sufficient data is available on comparable business transactions.

To get started, owners need to collect necessary data, which can include:

• Financials. At least 3-5 years of historical financials (balance sheets, income statements & cash flow statements).
• Industry Information. Research and understand current market trends, the competitive landscape, and the industry’s future growth potential.
• Economic Conditions. What is the current state of the economy, and how could it impact the business?

Professional Assistance

While business owners can certainly begin to gather information for valuation and due diligence purposes, the guidance of an M&A expert can be invaluable. Their experience and knowledge can save you time and ensure the accuracy of your valuation. Multiple professional types may offer these services, including:

• Business Valuation Experts: Certified Valuation Analysts (CVAs) can provide independent, objective valuations and assist with complex calculations.
• Accountants: Accounting professionals can assist with financial statement reviews for fair value calculations and the overall due diligence process should a transaction be contemplated or completed.
• Attorneys: Legal professionals can help review and draft agreements and be trusted guides for the overall transaction process.

Are you contemplating a sale or growth investment in your company but have questions? Connect with our team of investors; we are always happy to talk!