Knowing the true value of your business will ensure that you have the confidence needed to make appropriate decisions for your company and business portfolio.
What is the Value of Your Company?
How do you calculate business value?
A business goes through many stages as it progresses through its lifecycle. Some need capital, others require partners, and a few may be ready for a sale. Regardless of which financing event your business is experiencing, you should know how to evaluate its market worth or be able to talk to a competent and experienced business appraiser.
Additionally, determining the value of your company may also be helpful if you are looking to finance your retirement or next project. Knowing the true value of your business will ensure that you have the confidence needed to make appropriate decisions for your company and business portfolio.
Before understanding how to appraise a business, it is important that you understand what a business valuation entails. A business valuation reflects the current economic worth of a business. The approach to conducting an appraisal may vary among evaluators and industries. But the factors included in such an analysis tend to be the same. Overall, the financial health of a business is calculated by assessing its team, assets, earnings, growth, and losses. That is within the context of its specific industry.
Different methods used to determine a valuation
There are a few different ways you can go about evaluating your business’ worth. It is important that you are familiar with each of the methods. So that you can employ the formula that best reflects your appraisal needs. Be consistent, however, and stick to whichever method you choose to employ to ensure more consistent and reliable calculations. We also have a guide on how to value a business.
1. Consider your assets
This method, although imperfect, determines the value of a business. It takes the difference between the company’s total assets and total liabilities. To begin, make a list of everything the business owns. This may include physical items like machinery, property, and raw materials in addition to intangible items like intellectual property. Next, assign a monetary value to each asset. Sum up each of the assets’ values before subtracting any debts or liabilities from this number.
The valuation that this approach yields is likely a lot lower than the business’ true worth. This because it fails to consider expected revenue and earnings. Regardless, it is a great starting point for appraising a business. This is especially if you do not have profits and are looking to liquidate.
2. Consider the market
This approach determines the value of a business by considering the market prices of similar assets or businesses sold recently or are in the process of selling. It also considers the value of your business based on geographical location and area. It is especially helpful if you want to determine what particular asset, or business, to purchase or sell within your local market. This method usually utilizes publicly available data regarding company comparables and transactions. There should be adjustments for different quantities, qualities, or sizes when comparing assets.
Regardless, this method is not usually employed for smaller businesses if comparable companies within the same industry do not publicly disclose information regarding their assets and investments.
3. Consider your revenue, profits, or income
Arguably the most complex method, the revenue approach enables you to evaluate your business based on its annual sales and expected income. There are three valuation methods you can employ that consider revenue and future earnings.
Discounted cash flow:
This method appraises a business based on its expected future cash flows. Essentially, it involves determining the value of a company today based on forecasts of how much money it would generate in the future. This method will not be feasible if the evaluator is unable to determine an appropriate discount rate for the model or assess the conditions of the capital market.
Using this method, you can evaluate a range for your business’ current value based on future revenues. To do so, you must assign a revenue multiple to your business. This is so that the maximum value for your business can be determined. The value of the multiple is found by considering gross annual revenues and the selling prices of comparable businesses in the industry. However, the value of the multiple can vary based on the industry, the time period considered, or the method of revenue measurement used. For example, companies or industries experiencing growth would use a higher multiple. On the other hand, companies or industries lagging in growth or lacking potential might employ a much lower multiple, instead.
Regardless, evaluating your company based on this method is ideal for younger companies who have yet to experience earnings. Additionally, companies that are expected to grow rapidly can benefit from basing their valuation on a revenue multiple.
With this method, the expected profit of the company is used to derive a more accurate appraisal of its current stock price. Using a multiple of the company’s earnings — or the price-to-earnings (P/E) ratio — you can estimate the earnings of the company for the next few years.
This method tends to be more reliable. This is because profit is a stronger predictor of the company’s financial success than sales revenue. Additionally, this is a relevant method for potential investors interested in determining whether the stock price of a company is overvalued or undervalued.
When you are ready for a certified 3rd party valuation, Business Appraisal FL|GA|HI will value your business 6 different ways including:
1. Adjusted Tangible Net Worth
2. Capitalization of Earnings
3. Capitalization of Dividend Capacity
4. Discounted Future Earnings
5. Discounted Cash Flow
6. Capitalization of Gross Revenues
We will also research comparable transactions within your specific industry.
No matter the reason for your business valuation, Business Appraisal FL|GA|HI is ready to have a confidential conversation about your situation and our business appraisal services. Here are the relevant questions to ask when choosing a certified valuation company.