A business valuation is a process that calculates the value of an organization. It’s essential to make financial reports, dividing shares, selling all or part of your business, creating succession plans and obtaining funds.
The value of a business can be determined by its assets, earnings or market potential. The most widely used methods to evaluate a company’s worth include the multiples of earnings method or times-revenue method, and the discounted cash flow technique.
The times-revenue or earnings-multiples method multiply your business’s earnings or revenue by a standard industry multiple to determine a value. This is a good method to get an idea of what your company is worth, but it’s not always able to give you a complete picture. A cafe that earns $250k annually, and is valued at five times that amount, might be worth more if it’s got an established brand or high quality dining experience.
The formula for book value is another popular method. This method adds the assets of your business, such as equipment inventory, real estate and inventory, and subtracts liabilities, which are outstanding debts and loans. This method is quick and simple, but it may not accurately reflect the true worth of your business, especially when you are considering the possibility of growth. Buyers and investors are usually more interested in the possibility of future profits than the current assets. It’s important to have an appraisal that is complete by a business appraiser or broker before you consider investing outside.
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