If you're an entrepreneur looking to buy or sell a business, you need to know the business's real value.
Step 1: Research Look online to find recent news in the industry. Compare how well this business is doing to the performance of its peers.
Step 2: Compare assets to earnings Compare the assets to the earnings. If the earnings aren't enough to cover that amount, then the business's value is no greater than the value of its tangible assets.
Step 3: Compare the business against its peers Compare the business to its peers. If the business is average in its industry, you can value it using a rule-of-thumb or market approach.
TIP: Market approaches don't always work well for businesses with high intangible assets, such as a strong brand name, patents, or proprietary technology.
Step 4: Use a ratio Find the P-to-B ratio by dividing the share price by the book value of the business's equity and then subtract its assets.
Step 5: Use the income approach Apply an income approach. Choose your earning level, for example, pretax income. Multiply it by the appropriate conversion factor, such as a capitalization rate or a simple multiplier.
Step 6: Add liquid assets Add the company's liquid assets -- its cash and net accounts receivable -- to your result.
Step 7: Make your move Buy, sell, or move on. But that's a decision for your business instinct -- and there's no formula for that.
FACT: More than 80 percent of entrepreneurs have full- or part-time jobs, or are managing an existing business.