If a business is considering taking on an investor, knowing the market value of ones business is vital to negotiation. Before accepting any money from a potential investor, it’s first important to understand the value of your business. Steps for valuing the appropriate amount of the investment and how much of an ownership stake the investor should have is important. It is based on their funding and other value they can bring to your company.
Business valuations are crucial for a wide range of companies, from budding start-ups to well-established enterprises.
Determining business worth
A business market value might be necessary under several circumstances such as when one is contemplating selling business, seeking to raise capital, involved in a merger or acquisition, or engaged in succession planning.
Determining the economic worth of your business is crucial for various reasons. Regardless of whether one is a seasoned entrepreneur or just starting out. There will come a time when one need to place a monetary value on company. For those who lack financial expertise or access to an experienced finance team, the task of business valuation may seem daunting and complex.
What is a business valuation?
A business valuation determines how much a business is worth in monetary terms.
A valuation will take into account a number of characteristics of the business such as its asset inventory or its cash flow when determining its true value.
A business valuation can be determined by a range of methods and a business valuation will often be reached by combining a blend of these techniques for a more comprehensive view.
When looking to undertake a business valuation exercise it’s a good idea to seek independent, specialist advice from a financial services professional with experience in industry.
Why business valuation is important?
A business valuation is vital when a business is looking to raise investment or for the process of selling, merging, or purchasing a company.
An accurate valuation provides a transparent and pragmatic view of your business’s market worth.
Being aware of your business’s value enables you to determine a fair selling price, negotiate efficiently with prospective buyers, and secure beneficial financing deals, among other advantages.
An accurate business valuation also serves as a guideline for the long term financial health of your business and its potential for long-term survival.
It illuminates your company’s strengths and weaknesses, thereby enabling you to make more strategic decisions in the future.
It’s like a health check-up for your business, giving you insights into its vitality and endurance over time.
How to evaluate company value?
Your business valuation can be determined by a variety of factors, including total assets, total liabilities, current earnings, and projected earnings based on the quality of your idea and market potential. While there’s no right way to determine this valuation, it’s a good idea to have it looked at from different perspectives, so an investor or potential partner can see you’ve done your due diligence.
Discounted Cash Flow (DCF)
The Discounted Cash Flow (DCF) method is a sophisticated approach to business valuation that focuses on determining the present value of future cash flows.
In essence a DCF business valuation will calculate what a future cash flow stream would be worth today and therefore figure out how much a company might be worth in the future.
This method is typically used by established businesses with stable and predictable cash flows projected for the coming years.
To calculate the present value of future cash flows, you apply a discount interest rate to account for any risk factors, like unforeseen expenses or bills, and the time value of money.
Asset value of business
Take your total assets and subtract your total liabilities. This approach makes it easy to trace to the valuation because it’s coming directly from your accounting/record keeping. However, because it works like a snapshot of current value it may not take into consideration future revenue or earnings.
Business’s cash value
If your business has a good understanding of its cash flow analysis, you’re already taking into account your current and future potential earnings. This measure can be applied over a specified period of time. If you don’t already have this perspective, a CPA, online accounting software, or other type of financial planner can help prepare this for you. Another variation on this can be a discounted cash value analysis, which considers the value of today’s money under tomorrow’s economic conditions.
Multiply business revenue
A popular way to determine a company’s potential value quickly is to multiply the current sales or revenue of a company by a multiple “score.” For example, a company with $200K in annual sales and a multiple of 5 would be worth $1 million. The more confident an investor is about getting a return on their investment, the easier it is for you to command a higher multiple. The multiple used can vary widely based on a variety of factors, including:
While the revenue multiplier is considered one of the easiest methodologies to determine the value of your business, for credibility, it’s best to have this done by an independent third party.
Price-to-earnings ratio
Price multiplier is more widely used if you have shareholders. This method takes the Price Per Share (PPS), the current market trading price of a company’s share, and divides it by the Earnings Per Share (EPS). This gives you the net profits earned by the company per share in the market. The higher the EPS, the better. Ultimately, this allows comparison between the share price of a company to similar companies in the market. Prepare two views: one that shows earnings before taxes and one after taxes.
