How To Know How Much Your Business Is Worth
You may be great at running your business – but do you know how much your business is worth?
Most owners have to calculate it at one point or another. It may be because you need to get a loan, are involved in litigation or a merger, or even looking to cash out and sell your company.
However, there’s more than one way to come up with a value for your business. Join us as we explore a few of them and how they work for your organization.
What Does it Mean to Value a Company?
In the most straightforward terms, valuing a company is the process of figuring out a hard financial value that represents the company’s assets and potential for future business.
As you might expect, a portion includes the company’s physical assets or inventory, from buildings to equipment to items your company may sell. These can be relatively straightforward to value in most cases, as it’s likely that similar items are bought and sold every day.
However, you’ll also need to value less obvious assets like a brand name, intellectual property, or other similar items that provide value to your business. In many cases, you’ll also want to consider the value of the company’s ongoing business and relationships – essentially, what the revenue and profit that a new owner could expect just by keeping the organization on autopilot.
These latter two categories tend to be more open to interpretation, which can produce significantly different values for the same company.
Popular Methods to Value a Company
As we mentioned above, there’s no one-size-fits-all approach to how to value a company. Here are three of the most common methods, along with how and why they’re used.
Cost Approach
Perhaps the simplest method for valuing a business is the cost approach.
Using this approach, the value of a company is considered to be equivalent to what it would cost to build that company again from scratch today, or the total assets on the balance sheet minus any liabilities.
This includes the value of inventory, equipment, physical locations, and other assets but ignores any value creation from your business, as well as the value of future work or cash flow.
This isn’t as commonly used but can be a good approach for organizations where assets make up a large part of a company’s business and value, like real estate.
Market Approach
Do you ever comparison shop to see what a fair price for an item is before purchasing?
That’s essentially the idea behind the market approach to how to value a company. It assumes that, when considering what a company is worth to a potential buyer or investor, they’d only be willing to pay what other, similar companies with known values are worth.
These comparable values can be found from recent transactions or calculated for publicly traded companies.
This approach can better take into account the future value of the company missed by the cost approach, but can be unreliable in industries where there aren’t many available comparable businesses or a lack of good data.
Discounted Cash Flow Valuation Method
Discounted cash flow (DCF) analysis is the most sophisticated way to model the value of a company, and most commonly used in the small business environment.
At its core, it looks at current business data to forecast the money the company is expected to make in the future. The particulars can get a bit complicated for those who aren’t as financially inclined, with concepts like the weighted-average cost of capital and discount rates. But the basic idea is that investors or buyers basically view the company as a source of cash flow and will only pay a certain amount for that cash flow, relative to the rest of the investment landscape.
This method can produce a detailed, fine-grained value of an organization, but may be less useful for companies or industries with less consistent business.
Need Help Figuring Out How Much Your Business Is Worth?
You never know when you may need to know how much your company is worth – whether a tax bill is coming due, you’re looking to bring on new investors, or potentially cash out and sell.
But if you’re like many business owners, you may prefer to spend your time working on your business, rather than working in it.
U-nique Accounting can help you understand your business value, strategize your exit plan, and so much more.
Use our easy calendar to book your first free chat with one of our friendly accountants.
We’re always here to help!
