What Is the Value of a Home Business?

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Competitive Advantage

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  A home business's competitive advantage represents the marketable niche the business fills for its clients better than any competitors can; a stronger competitive advantage equals more market value for the business. Sometimes a business's competitive advantage is referred to as a value proposition or differentiation. Factors playing into a home business's competitive advantage over another business include differences in price, selection, customer service and overall company focus or mission. If clients perceive that a home business offers something valuable in one or more of these areas, that will likely increase customer loyalty and increase the home business's value.
  
  

  
  

Business Value

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  The value of a home business can also be seen as a combination of the steady earnings brought in by the business as well as any equity a home business owner holds in the business. Both are used to determine the value of a home business in the case of a sale. Companies that cost less to start up generally create less business equity; for instance, a copy writing business might consist of a computer and some small supplies, but a home magazine printing service would be sold at a greater value because of the advanced technology involved.
  
  

  
  

Different Methodologies

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  There are numerous formulas used to determine the value of a business, and each of these may give slightly different results when it comes to figuring out how your business should be valued. Retail home businesses would likely use asset valuation, which considers the market value of inventory and equipment as well as the owner's benefit, or how much money the owner makes through the business.
  
  Small businesses unable to adequately price their inventory and equipment for asset valuation may try a capitalized earnings approach; this rule calculates one year's earnings as 20 to 25 percent of the business value. Other value methodologies for home businesses include leapfrog startup, which figures in the money saved by the person buying the business because of the owner's work to start the business, or values of specific intangible assets, which can be useful for businesses that experience an unusually loyal customer base or other positive business intangible.
  
  

  
  

Tax Deductions

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  The Internal Revenue Service (IRS) allows home business owners to take a deduction on their personal income taxes based on the amount of personal property being used solely to operate the home business. To qualify, a specific area of your home must be used as a principal place of business and as a place to meet with clients and business partners. You must be able to prove that this area of your house is used exclusively for business unless you use part of your home to store inventory, samples or other business assets. To learn more about home business tax deductions, home business owners should review IRS Publication 587, "Business Use of Your Home"