There are many reasons why you would want to know the value of your existing business. For one, it might just be the curiosity factor where you would like to estimate the worth of what you have built up over the years so that you can plan out ways to further build on the existing platform. On the other hand, if you are planning to sell your business, you would want to have a fair idea of its worth so you can aim for the best and optimised prices. The same is true if you are buying a business – knowing the value will help you to get it at the true price.
Here is a lowdown of the many factors related to business valuation.
Data required for Business Valuation
Regardless of the purpose for business valuation, there are certain fixed inputs that are indispensable if you want to use a business valuation calculator. For a rough estimate, take the following inputs into account – net profit and growth trends, niche and industry, age of business, assets and age of the company.
However, these will give you just a rudimentary idea as business valuation is a more intricate and complex task. To arrive at the true worth of your business, it is always advisable to hire professionals with high degree of expertise in this field. Initially, hiring a consultant might seem a costly proposition but it will pay back in the long run when you negotiate prices based on accurate and precise data of the value of your business.
Primary Inputs for Business Valuation
There are some specific angles that have to be considered when working out valuation of a business.
- Value of assets – This can be a start to business value appraisal. What does the business own in terms of plant and machinery, equipment, and inventories? Is the equipment leased with financial institutions having a charge over it or is it under the exclusive ownership of the owner? For the former, you have to take into account the interest and repayment amounts too. The balance sheet is the benchmark in all such cases to get the correct picture of the state of the business.
- Business valuation multiples by industry – You can calculate the value of your business through a number of valuation multiples each corresponding to some measure of business performance. Some of the Business valuation multiples by industry in USA are Enterprise Value (EV) to gross or net sales, EBIT and EBITDA, owner’s equity and total business assets. By multiplying the business earnings by the valuation multiple related to a specific industry, an estimate can be had of the worth of the business.
- Revenue – This is the very basic parameter to know a business value. If a business sells about $1 million per year, this can be taken to be a revenue stream. Often a business is valued at “time sales” such as one time sale or two times sale. This again depends on the industry the business is in. A business valuation expert who has worked in the industry you are in can advise you well in this regard.
- Earnings – Earnings is very crucial because revenue is not a reflection of profit. This is why multiples of profit is a good indicator of business valuation. Profit can be used for growth and diversification or dividends to the shareholder. By estimating the earnings generated for the next few years, you can know how much it is of worth to you. However, such aspects as supplier price changes, increase in competition or a declining industry should be factored into the calculations.
These are some of the ways to arrive at the actual value of your business.