Do you know how much your business is worth? Too many people over or under value their business. You need to know how much your business is worth if you’re planning on finding an investor or a buyer. Here is how to value your business.
Using the assets of a company is one of the most basic ways to estimate how much it is worth. To put it simply; how much is everything in your company worth? How much money does it have and how many liabilities does it have? When you put it all together you have a basic idea of how much your company is worth. Or a rough estimation at least. The truth is that people who sell their company based on their assets tend to get lower valuations because of the way that accountants work. Many times you’ll actually get more money if you use another method, such as the “Discounted Cash Flow” method.
#2 Discounted Cash Flow
Using the “discounted cash flow” method basically means that the potential buyer will take a look at how much they expect you’ll earn in the future. The more stable your cash stream is the further in the future they look. They use what they expect you to make in the future to determine the current value of your business. It also makes it easier for them to predict how much it will be worth in the future if they plan to sell it out in the end. This method focuses on two key things; how much money your company is expected to make and how reliable that cash flow is. If your company is performing well and indicators show that the success is likely to continue for the foreseeable future then discounted cash flow will give you a good price. However if you have a lot of assets (such as land) but not much cash-flow (or are even losing money) then assets based valuation is for you.
#3 Market Value
Finally we have the market value method; sometimes known as comparables. This where a buyer will compare your company to other companies in the area that are the same business type and size as yours. There are some flaws with this method. The key flaw being that sometimes people end up comparing apples to oranges. Comparing one business to another isn’t always the best method to determine the value of a company. A good comparison can give you a pretty fair price though. Of course an unfair comparison, such as comparing a small company to a Fortune 500 company of the same type, leads to naught but disaster.
Which method you go with really depends on the type of business you have and how it is performing. If you have a lot of assets but not a lot of cash flow then go for the assets valuation. If you don’t have a lot of assets but you’re making a lot of money then go for discounted cash flow. If you know your competition and you know that you’re doing better than them then the market value method may be best. Of course you could also just have your business professionally valued for you by a third party too!