Knowing the value of your small business is important especially if you plan to sell it or look for investors. Calculating business’s value ca be tricky but it is not impossible for you to get the most accurate numbers. Estimating the economic worth of your business can be challenging especially if you are not financial expert. So how can you figure out what your business is worth?
Most common reasons for valuing business
People value business for many different reasons. However, the most common reasons include the selling business, planning on selling stock in the company, trying to attract investors, a bank loan, simply understanding business’s growth. Therefore, you can estimate and calculate your business’s value even if you don’t have any particular reason. It is beneficial to know what your business is worth for your own knowledge.
Business valuation for investors and buyers
For buyers and investors, business valuation is vital so they can make the right decision with the information. They also need the value to be in a form of valid evidence so they get better understanding of how much money is reasonable to invest. Improper valuation of business should done properly. Otherwise, it can lead to various financial issues in the future such as upset investors, unimpressed buyers, and damaged reputation.
Methods used for business valuation
To valuate your business’s worth properly, you need to use the proper methods. There are two common methods used called Discounted Cash Flow Method and Comp Method. Various experts recommend business owners to attempt both methods when valuating business’s worth even though the former method is way more complicated than the latter. Comp method or also known as multiple method is often used due to its simplicity.
Using multiple method for business valuation
In using multiple method or comp method, there are many things you need to consider, such as:
About capital assets
When valuing your business using this method, you need to forget about your capital assets. It is common mistake to associate asset value with business value while the two are completely different separated entities. Your business valuation is calculating of how much cash is tied up in your business. Buyers and investors are more interested in how much money they can earn through the products and services produced there, not
Be aware of gross income and all outgoing payments
Profit is what measured in business valuation, not the capital asset. A valuation is all about the money you are making the money you are likely to make in the future. Buyers and investors want to know how much they can expect to make if they decide to take over your business.
Calculate the value
To make the process of calculating your business’s value easier, you need to do proper bookkeeping from the beginning of building your business. To make correct calculation, you need to establish your net income, then look at multiples. After, you should figure out your market and determine your potential market growth rate. The final is to add growth projections.