How to Calculate the Worth of Your Business

Small business valuations

If you have your own business, the time may come when you need to determine how much it is worth. This is a more complicated question that you might expect. First of all, the reasons for wanting to determine the company’s worth has a big impact on final small business valuations. Many first time business owners are surprised when they find out that the subjective nature of a small business valuation. Regardless of the reason you need to perform the business valuation, it is always, at its heart, a financial exercise. When you ask yourself, “How do I start calculating the worth of my business?” the first thing you need to do is decide why you want to do this and then you need to assemble your financial information.

There are three common approaches that most people use when they are trying to determine how much a business is worth.

The asset approach considers a business to be basically worth the sum of its parts. Basically you take all of your assets and add them up. Take all of your debts or expenses and add them up. Subtract the debts and expenses from the assets and you have the general valuation of the business. This is the most predictable of the small business valuation methods but does not provide a whole picture for many businesses. There are many intangibles involved in running a business and determining its worth. The time when the asset approach to business valuation may be if you are divorcing your spouse and you need to quickly determine the value of a business. If you are considering this approach, you really should start by asking yourself, “Why am I calculating the worth of my business?”

The income approach looks at your revenue stream as it is now and where it will go. This is considered to be the most technical approach of the three. What you need to calculate is the “Earnings Before Interest, Depreciation and Amortization” (ERIBA). In these businesses try to calculate what they will make in the future. This is often the way stock analysts will evaluate companies when they go public.

The last method is the market approach. Basically, you look at businesses that are similar to yours and see how much they are worth. It is great when you find a company that is in your industry and is about your size that has been sold. You can extrapolate from this what your business is worth. Economic experts consider this to be the most subjective of the three approaches. Like the other approaches, it does not take all factors into consideration. If someone compared Apple to Microsoft when they both were young and did not include a comparison of Bill Gates and Steve Jobs it would not have been complete.

What approach should I use when calculating the worth of my business?

If you are not sure which approach you should take, some experts recommend conducting all three. They suggest business owners then evaluate the results of each and go with the one that meets their needs at the time. Again, a lot of this comes down to the reason for conducting this kind of analysis to begin with. If you are pitching investors, knowing how much you are going to bring in may be an important part of your proposal. If you are just looking to sell, another approach such as the asset approach may be what you are looking for.

Small business valuations are more like art than science. When you are just thinking the question, “Why am I calculating the worth of my business?” you have to keep that in mind. Entrepreneurs often see their business’s value through the prism of what they want for it and how much potential they see in it. While this is natural, it is important to leave emotion behind when working on this. If you are asking yourself, “How do I go about calculating the value of my business?” you may want to consider bringing in an outside expert who has not put their heart and soul into developing and building the business in question.



Valuation of Business and How to Get it

Business valuation service

What Valuation Is
The valuation of banks is when an estimation is taken of its market value. The aggregate risk, time and income are all taken into account. In order to complete an accurate valuation of banks, one must have a very good knowledge of valuation techniques as well as of the banking industry itself and it’s specific characteristics of valuation. Let’s focus on the four most used valuation techniques to help you get a better understanding of how valuation of banks is handled and completed.

What Information is Need for Valuation
Finding out a small business valuation model is an economic analysis exercise. The financial information of a company provides important data to ensure the process. The income statements and the balance sheet are probably the most important pieces of information that you will need to help you understand the value of a business. In order to do a correct job of valuing a business, three to five years of income statements and balance sheets should be compared. A business valuation firm will make it its priority to comb through these statements and find out exactly what is needed from them in order to place a value on the business. Of course, that value could change but if you are considering a merger or buying out a company, that will help you to get a better idea of what you are getting into.

There is business valuation services available if you do not think that this is something you should be looking into yourself. Having an expert take care of the financial side of things is a very good idea if you do not understand valuation techniques and how to properly use them in order to find out what you need to know about a business. As long as you give them permission, a firm can acquire any information they think will be pertinent to getting you a correct value of a business that you are looking at.

What Valuation Techniques Are
These are the methods used in order to find out the value of a business.

  1. Discounted Cash Flow Analysis
    This is the best way to find out a company’s value. There are two ways within this method to approach valuation: the adjusted present value and the weight average cost of capital. In order to find out both, one must calculate the amount of cash flow that a company has as well as the net value of the cash flow.

  2. Comparable Transaction Method
    For this method, one must look into past transactions that have already taken place within the industry. The transactions that should be scrutinized are the one that are similar to whatever transaction is about to take place. A key valuation parameter is what is being looked for within this technique.

  3. Multiples Method
    A lot of times there is just simply not enough information to determine a valuation using the other methods. If this is the case, you can figure out a valuation based on the market valuation multiples. This method is done by looking at other multiples and what they have been used for within other companies in the same industry.

  4. Market Valuation
    This is the last of the commonly used methods of valuation of banks and other companies. This method says that 9in a free market, the effect of demand and supply on the value of the company needs to be within certain balance parameters. This often happens when the buyers do not want to pay such a high amount and the sellers do not want to receive a lower amount. The value is them compared to the corresponding commercial entity.

While there are other methods involved in business valuation, these are the most commonly used because they can give the most accurate information. It may seem odd that the results of a valuation would depend on your need for the business but business value is not black and white or absolute. It’s basically just an attempt to measure what the business is worth by looking at how you measure the business and under what circumstances the business was measured. These are known as the standards of value and the premise of value. Once these elements are understood, the value of the business is much easier to estimate.