Finding out how much your business is worth is important for various reasons. For example, if you want to sell your business, your business valuation will determine the price you can sell it for. There are various methods used to determine how much your business is worth, most of which involve its financial history and cash flow projections.
An asset-based valuation
An asset-based valuation looks at your business assets and liabilities. Your business assets are what it owns, such as the equipment or inventory. After all, someone buying your business would have to buy all of this if starting a business from scratch. The business is, therefore, worth at least the replacement cost. Liabilities are the debts your business owes to creditors.
Peterson Acquisition is an M&A firm that will help you to conduct a business analysis and realistically evaluate the financial performance of your business. A clear report that is easy to understand will evaluate information such as liquidity, profits and profit margins, sales, borrowing, assets and cash flow.
The balance sheet of your business will show the value of your assets and liabilities so you can subtract the liabilities from the assets. For example, if you have $100,000 in assets and $50,000 in liabilities, the book value of your business is $50,000.
This is called the owner’s equity on the balance sheet and this should be the lowest price at which you’re willing to sell. If you’re selling a healthy business, you can sell it for much more than book value.
A market-based valuation
This method will compare your business to similar companies that have been sold already and estimate the value of your business accordingly. If your business is valued at an amount that reflects fair market value, it means its net worth is what buyers are willing to pay.
Small business M&A firms will help you to research sales typical in your industry to come up with a fair market value. Chad Peterson of Peterson Acquisitions says that when sellers have an accurate business valuation, it gives them confidence in the negotiating process and lays a foundation of trust during all phases of the transaction.
An income-based valuation
An income-based valuation is based on the financial history of your business. It looks at your books to determine whether your business is a low-risk, profitable investment. Your profit and loss statement shows your past profits and cash flow.
By looking at this, it is possible to project future profits, debts and cash flow. By using these projections, you can determine the value of your business. For example, if you estimate your business will earn a net profit of $100,000 by averaging net profits from previous years, you might set the price of your business at $100,000.
A discounted cash-flow analysis
A discounted cash-flow analysis is a complex formula. It looks at the annual cash flow, projects it into the future, and then discounts the value of the future cash flow today. A ‘net present value’ calculation is possible to calculate using calculators, tables, spreadsheets or special NPV calculators.
The discount rate element of the formula accounts for the fact that a dollar earned in the future isn’t worth as much as a dollar earned in the present.
Don’t just consider the numbers
The value of your business is not just based on numbers. For instance, it may have a value based on its geographic location. Perhaps it has potential strategic value to a competitor. Remember that the value of your business is not set in stone. You can continue to build value over time with some careful planning.