How to Know How Much Your Business Is Actually Worth
If you have your own business, it is always a good idea to know exactly how much it is worth for different reasons. Whether you are trying to sell the business of solely a few shares of the company, wanting to secure investors for additional financial support or simply want to grow or expand your company, understanding your business’s worth can help you determine what are your areas of focus and potential areas for improvement.
If you have built the business from scratch, it can have sentimental value to you, although bear in mind that buyers and investors will not share these same feelings, only numbers, however doing a business valuation can be quite overwhelming and complex. In this article, we will advise you on how to know how much your business is actually worth.
What Affects Business Valuation?
There are some specific factors that will have an impact on how much your business is worth. Some are somewhat easier to evaluate, such as assets and stocks, others not so much; These include your business’s reputation, the value of the company’s clientele, your business trademarks, how long the business has been running as well as the type of products you sell. These factors are what make business valuation more complex. No matter how much experience you have with business valuations, it is important to perform due diligence, to balance the benefits and risks of the business in question. If you feel too overwhelmed by the processes and numbers, hiring a professional to guide you through the process is a smart move.
Business Valuation Methods
Price to Earnings Ratio
More often than not, a company is valued taking into consideration its price to earnings ratio, which essentially means profit generated by the business. This is why deciding the price of the product you sell is so important, to begin with – this will not only decide how many people are able to afford your product but also how much profit you can actually make from sales, after paying for expenses. If your business has a good history of stable profits and shows good promise in sales for the future, it will have a high earnings to ratio, making it more valuable.
The entry cost entails anything that has been spent in order to start up the business and develop it into the company that it is today. Expenses to take into consideration are how much money it was needed to start up the business, develop products, how much it was spent on marketing strategies and clientele growth, and to even recruit, employ and train staff. When you add up all of these factors, you can reach a figure for a valuation.
Valuing The Assets of a Business
As we mentioned previously, the assets of a business will have a great impact on its valuation. The more assets a company has, the higher it will be worth. Every business should have its assets recorded in the company’s accounts and often designated as Net Book Value. Additionally, you should consider the monetary reality of your existing assets, to understand what they are actually worth.
A good example of this is an old stock or a property, which will be depreciating in value. These should not be taken into consideration for the valuation. Moreover, if there are any debts that may not get paid, make sure to knock these off your list.
Discounted Cash Flow
This way of valuing a business should not be used by smaller businesses who are still at the early stages, as it entails basically predicting the future. This can more easily be achieved if an older business has had stable cash flows throughout the years, making it easier to assume what cash flow to expect in the future. You are able to determine your business’s worth by calculating the dividends forecast for the next fifteen years or so, and by adding the residual value toward the end of the period.
A Valuation Based on What Cannot Be Measured
It is important to remember that negotiation skills are a must in any valuation. People experienced in this area will do their best to negotiate a good price whether they are wanting to invest some money into the company or buy the whole business. You can have all the figures from what we discussed above, but there are other factors that may be taken into consideration that you cannot necessarily measure. These include good rapport with customers or suppliers or even a strong management team, that may lead the business in the right direction. Potential buyers are unique and will have different perspectives, it is your role as the business owner to minimize risks and make them see the benefits.
Knowing how much your business is actually worth is essential if you want to sell it or simply get someone to invest in it. Follow some of the tips above to make sure that you reach a reliable figure for your company’s worth.