What is your business worth? As a business owner, you know that the value of your business impacts your ability to raise capital in response to changing market conditions, and on your overall estate. A business valuation helps you:

• Determine the approximate value of marketable assets in the event that the business is liquidated.

• Establish the value of each owner's interest for personal planning purposes, if the business is to be retained for the owner or the owner's survivors.

• Set a fair purchase price for each owner's interest if the business is to be sold, or if a buy-sell agreement is involved.

There are several general ways to value a business, and Northwestern Mutual is happy to provide an introduction to three of these approaches. Contact a Northwestern Mutual Financial Network Representative near you, who can help you develop a more detailed analysis based upon your particular situation.

Under the market approach, the value of your business is based on an analysis of the purchase prices of similar businesses in the market. The appraiser uses financial ratios to compare your company to other companies and then develops a set of appropriate multiples to use in the valuation. An earning period is selected, usually the last 12 months, but it may include multiple years, and earning and cash flow are analyzed using the multiples. Then a value is selected based on how your company compares with the others.

The asset approach uses the value of the assets being purchased to determine your company's value. The first step is to determine the book value of the various types of assets. Original cost minus depreciation works for some assets. Cash and marketable securities are valued at face value. Inventory values vary by type.

The next step is to adjust these values to reflect their fair market price, which results in an adjusted book value. After both fixed and intangible assets are evaluated and adjusted, liabilities are deducted—short-term debt at face value, long-term debts at a discount. Subtracting the liabilities from the adjusted book value then gives you the value of your business.

Also known as the discounted cash flow approach, this approach focuses on the earnings of your business. The value is based on an estimate of the income the purchaser could reasonably expect from the business—including earnings, dividends or cash-flow capacity. In this analysis, one method used is the capitalization of income. The income approach is widely accepted as fundamentally sound. However, there is some difficulty in properly projecting earnings into the future and accounting for trends in the overall economy.