How much is your business worth?
Business valuation is a process used by accountants or by specialist company valuers to determine the worth of the business. This tools are employed by companies who are about to sell their enterprise or those who are about to buy another business. These tools can be used for various business and legal purposes – whether you want to determine the value of your enterprise or another company’s enterprise. Let us assume that you would want to sell your business. Primarily, there are four ways to determine its worth – something you should consider before you finalize your transactions.
When you are trying to sell your enterprise, it means that you are also selling the rights to any profits that the business may accumulate in the future. The capitalized future earnings method makes use of the values of the Net Profits and Return On Investment or ROI as its basis.
Essentially, this method determines the value of a business by dividing the Net Profits by the ROI. The value of the Net Profits can be derived from the profit-and-loss statements of your business from the past three years. The ROI, on the other hand, is the rate of return that your buyer may expect upon purchasing your business.
Looking at the present
Asset valuation is considered as the simplest way to determine how much a business is worth. It uses the values of your assets and your liabilities. Add all of your business assets such as cash, stock, plant and equipment, and receivables. Then add all your business liabilities such as bank debts or loan repayments, or simply any amount of money your business owes. Then, subtract the total value of the liabilities to the total value of the assets.
However, this method does not make use of the goodwill of a business. This goodwill is usually used for retail or those businesses that offer services. It is the difference between the true value of a business and the value of its net assets.
Look at your neighbours
The earnings multiple method is considered an easy method that depends on the values of other businesses that are similar to yours. By simply multiplying the earnings before interest and tax (EBIT) value by a selected number you may find the worth of your business. The selected number is called a multiple. This multiple depends and varies on the industry and growth potential of your business.
On the other hand, the method of comparable sales also relies on other similar businesses. By considering the prices of the sales of the businesses similar to yours, you can compare the value of your own business.
Almost all of these methods are used to validate the value of businesses. However, you should always remember that whatever method you may opt to choose, you should consult with experts such as business brokers, accountants, and business valuers. This way, you can fully understand the process of determining the value of your business and what it really means.