Business valuation refers to the process of estimating the net worth of your business. It can help you as a business owner looking to sell your company determine the ideal selling price.
It can also help a potential buyer decide whether to purchase the business or find better options. Similarly, both lenders and investors like to determine the value of a company before putting their money on the line.
However, determining the monetary value of your business is not as straightforward as you may assume, especially if you are not a financial expert.
The good news is there are different methods you can use to value your business, and here are some essential tips to help you come up with an exact amount.
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Ignore Capital Assets
Unless you are a certified chartered accountant or financial expert, one of the biggest mistakes you will make is including asset value in your business value. For you to get your business value, you have to minus assets from liabilities.
Assuming you have a business with an office block worth half a million dollars and products and supplies totaling $100000 in addition to the financial backing of 200,000 dollars and machinery totaling 85 thousand dollars, your business has capital assets worth 885,000 dollars. If you decide to sell your business today, this is the amount you would get from the sale watches that translates to the value of your business.
However, this is not what your business is worth. The total worth of your business depends on how much cash is tied up in the business. Any potential buyer will not care about how much money they will get from selling your business. Instead, they want to know how much money they can make from selling the services and products your company produces.
Determine Profitability
The valuation of your business depends almost entirely on how much money you make. And how much money the company will likely make in the future. Every buyer wants to know how much profit they can generate if they purchase your business. There are several valuation methods you can use to calculate the value of your business annually. It will help you spot any growth opportunities. You have to factor in multiples in the longevity meters since you do not expect your business to stop operating soon.
Consider profitability adjustments since no business generates the same profits every year. You should therefore include the amount of profit loss or growth expected over the multiple. You can determine this based on the recorded financial data.
Calculate the Value
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Everybody hates the actual mathematics involved in determining the value of a business. But it does not have to be this way for the more accurate calculation.
With good bookkeeping, it shouldn’t take long. To start, you need to assess your business’s net income by subtracting all expenses from the gross profit. Second, you should look at your multiples. Smaller companies or those with a higher risk come with lower multiples. Although there is no specific way to determine this, you can come to a figure by researching your industry, your business’s financial history, and whether you have a contracted income guaranteed over the following years. You should also consider historical growth and variables.
To summarize, business valuation is the process of estimating the net worth of your business. When calculating the value of your business, ignore capital assets and determine profitability. With this information, you can calculate the value.
