How to Determine the Value of Your Business
Whether you’re trying to attract investors or sell your business, knowing the value of your business is critical to its success. However, many small and medium business owners admit to not knowing the value of their enterprise.
Running your business without knowing its true worth can leave you at a disadvantage when someone inquires about buying your business. It can also cause you to miss out on growth opportunities.
For business owners, it can be easy to get caught up in day-to-day operations or simply not want to pay for a business valuation. However, working with business brokers can deliver a business valuation to help you get the most out of your business now and in the future.
What Is a Business Valuation?
A business valuation is the process of determining the economic worth of a company. It evaluates such key factors as financial performance, tangible and intangible assets, growth potential, and market conditions.
When selling your business, a proper business valuation can ensure you’re not leaving money on the table or you don’t have an overblown idea of your company’s value. Understanding how much your business is worth can also help you target growth, land a bank loan, attract investors, or plan your exit.
3 Common Types of Business Valuations
Every business is different, and you can — and should — evaluate a business in many ways. Taking different approaches to how much your business is worth can provide you with a range of its true value and demonstrate to others that you’ve done your homework.
Here are three common types of business valuations:
1. Asset-Based
Consider this approach if your business has significant assets. Total your tangible assets (property, machinery, and inventory) and intangible assets (brand, customer loyalty, goodwill, and patents), and subtract your liabilities.
2. Market-Based
This method compares your business to other businesses of comparable size, performance, and industry that have recently been sold.
3. Income-Based
If your business has strong potential for growth, an income-based valuation might be best. It focuses on the business’s ability to generate profits in the future. You can use a capitalization factor to project potential profits based on past earnings or determine a value based on discounted future earnings.
Earnings multiples is another common approach that applies a multiple to earnings, such as net income or EBITDA (earnings before interest, taxes, depreciation, and amortization). Other key factors include growth potential, your management team, and industry trends.
How to Value Your Business
Consider these steps to arrive at a sound business valuation:
Determine the reason for the valuation
Gather your financial records
Pick your valuation methods
Apply the methods
Consider key factors of your business
Compare the results of the valuation methods
Business brokers with deep and broad knowledge and experience in small and medium businesses can help you arrive at a proper valuation for your business.
A Business Valuation Is Critical to Your Business
Whether you want to sell your business, find investors, or improve your operations, knowing the true worth of your business is as crucial to its success as staying on top of the day-to-day operations.
