If you’re selling your business, it’s important to clearly understand its value. Business valuation is the process of determining how much a company is worth, which can be useful for various purposes, from negotiating a sale price to estate planning.
But there are several different methods that can be used to value a business. The most appropriate method will depend on your specific circumstances, but common considerations include:
- Company assets
- Liabilities
- Earnings
- Cash flow
- Market trends.
If you’re looking to sell your business, or maybe you’re just curious about what your business is worth, you’ll need to know how to value your business. Luckily, it doesn’t need to be complicated. Here are three of the most common valuation methods you can use.
Business Valuation Method #1 — Asset-based Valuation
If you’re selling your business, one of the first things potential buyers will want to know is how much it’s worth. Several methods can be used to value a business, but asset-based valuation is one of the most common.
Under this method, the value of the business is equal to the sum of its assets minus any liabilities. This includes tangible assets such as:
- Cash
- Inventory
- Property.
This method also includes intangible assets like:
- Intellectual property
- Goodwill
- Brand recognition.
To calculate the value of a business using this method, simply add up the value of all the assets and subtract any outstanding liabilities and debts. While this method doesn’t take into account things like earnings potential or future growth prospects, it can be a quick and easy way to get a general sense of what a business is worth.
Business Valuation Method #2 — Income-based Valuation
Another method of business valuation is the income-based approach. Also called the “multiple of earnings method,” this approach values a business by calculating a multiple of its recent annual earnings.
For example, if a business has annual earnings of £100,000 and is valued at a multiple of four, its value would be £400,000. The income-based approach is most commonly used for small businesses operating for at least three years with a consistent earnings record.
This method can be less reliable for businesses that are newer or have more volatile earnings. Another downside of this method is that it doesn’t consider the value of assets such as property or equipment. However, the income-based approach can be a fast way to estimate the value of your business.
Business Valuation Method #3 — Market Value Approach
The third method of business valuation is the market value approach. This method looks at the company’s value in the marketplace, considering factors such as industry trends, economic conditions, and the company’s competitive position.
The market value approach can be used to value both public and private companies. In the case of public companies, the market value is the current share price multiplied by the number of shares outstanding.
For private companies, the market value is determined by looking at recent sales of similar businesses. The market value approach is a useful way to get a general sense of the value of a company, but it has limitations:
- It doesn’t take into account the specific circumstances of the company being valued
- It relies on publicly available information, which may not be accurate or complete
- It does not consider the potential for future growth or profitability.
As a result, the market value approach should be used in conjunction with other methods to get a complete picture of a company’s worth.
Choosing the Best Valuation Method for Your Business
While we’ve outlined three of the most common valuation methods, other methods are available, including:
Many different methods can be used to value a business, and which one you choose will depend on your specific circumstances. As a business owner, it’s essential to clearly understand your business’s value.
While it’s possible to calculate your business’s value on your own, it’s often best to hire a professional appraiser. These experts objectively assess your business’s worth, taking into account factors such as your financial history, market trends, and the value of your assets.
A professional appraiser will also help you understand the implications of your business’s value, giving you the information you need to make sound decisions about your company’s future.
Once you’ve accurately understood your business’s value, you can move forward with the sale of your business. You can do this by directly contacting buyers, hiring a broker, or using a digital marketplace for business sales like Foundy.
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