How Much is Your Business Worth
Whether the company in hand is a small/medium enterprise looking to grow or a ripe business that’s ready to sell and move on; it is inevitable that, at some point, the question “how much is my company worth” will have to be asked.
- Here’s why it’s necessary to know how much your business is worth
- How do you determine the value of a business?
- Which is the best evaluation method?
- Things to take into account
- The bottom line
Here’s why it’s necessary to know how much your business is worth
It helps you better understand:
- Where your company stands in the market compared to your competitors
- Your progress and growth so far, and what direction you should be taking next
- Your company’s worth for attracting future investors
- What to expect if you decide to sell
How do you determine the value of a business?
You don’t. You calculate it.
There are various methods to calculate how much your business is worth. While there is no set-standard golden rule to find out how much is a business worth, three primary methods are used to judge value:
1. The multiples approach
This method is a relative valuation approach that factors in different indicators of a business against comparable competitors in the landscape or other businesses within the same industry. The most common indicator used to deduce value is EBITDA; short for Earnings Before Interest, Taxes, Depreciation, and Amortization, which grants businesses insights on their overall performance margins while underscoring key metrics such as total net profits that are then compared against competitors’ indicators to ultimately calculate how much your business is worth.
2. Discounted cash flow analysis
Also known as DCF, this method relies on analyzing a business’ current valuation based on its projected cash flow from earnings derived from its growth trajectory from current investments. Several factors are taken into consideration while building a financial model to accurately estimate returns such as current investments, intangible assets, the end value of investments, an appropriate discount rate, investor risk profiles, and the conditions of the market.
3. Asset appraisal
Typically reserved for businesses that operate in asset-based industries ¬- such as real estate, this method deduces a business’s value by forecasting the prices of all assets it possesses which can be sold and turned into a profit. While in certain scenarios asset appraisals are ideal, it is not technically a way to evaluate a business’ overall value since it only assesses current assets without taking into account future growth possibilities and market fluctuations that could impact your overall value.
Which is the best evaluation method?
It all depends on the objective. Understanding a company’s value goes in tandem with the underlying aim of the question.
If you want to calculate the market value of a company
Compare businesses to yours that have changed hands previously and take note of the value of their shares and sale price to deduce your own based on your current EBITDA. Finding a business just like yours with identical business earnings is unlikely, which entails adjusting comparative factors such as revenue, value, brand strength, intellectual properties, and overall debts.
By using several companies as benchmarks, a more accurate result and valuation range can be achieved.
If you’re asking yourself how to value your startup
Consider a detailed analysis based on current results and objectives within a specified period which entails high discounted cash flow rates to create a clear overview of your business’s value. Using the DCF method in such a scenario not only allows businesses to project their strategies but also attracts investors seeking positive returns, which in turn drives up your stock’s value along with your company’s share price.
If you’re asking yourself how to calculate your assets
Identify your business’ high-value tangible and intangible possessions such as real estate properties, vehicles, offices, factories, outlets, patents, and physical investment securities such as precious stones and oil fields. Keep in mind that appraisals are only deemed legitimate if they’re conducted by qualified and disinterested third party appraisers regulated by national regulatory boards and meet Universal Standards of Professional Appraisal Practice (USPAP) guidelines in order to give sound evaluations and judgments that are accurate and impartial.
Things to take into account
Calculating the market value of a company relies on many aspects; however, some key points should always be taken into account when understanding your business’ worth:
Financial Performance
Take into account projected profits and how well costs have been controlled to date, as it is essential to account for capital expenditures that will be needed in the future.
Assets & Liabilities
Add up all your assets and exclude liabilities and debt obligations while factoring in current market trends related to your assets to determine their profitability.
Intangibles
Arguably one of the most important aspects that’s often overlooked; it’s mission-critical to consider the strength of your customer base and brand loyalty, as it allows your business to have a constant revenue stream and target audience to build on for other goods and services, along with dictating the potential for other spin-off benefits and avenues of growth.
Individuals
When valuing a business, the current management’s structure is a critical factor to evaluate to determine whether new buyers can run your business with minimal additional structural investments, staff reductions, and changes.
The bottom line
While there are many ways to deduce business value, the overall purpose and goal of the evaluation is a key aspect to keep in mind as it aligns strategies and investor projections to allow you to understand where you currently stand, and where you can go from here. Equally important is entrusting such a task to credible and reputable parties, as your business’s value is more than just a simple calculation, but a complex process that can make or break future objectives as well as investor sentiment.
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