How To Determine The Value Of Your Company
There are an infinite amount of valuation strategies for business owners to consider out there in the wilderness…
In fact, coming up with innovative ways to value a company is a thriving industry in and of itself.
And, all too frequently, the formula used to evaluate a company for sale is designed to justify the amount the owners want to receive, rather than to objectively value the business.
But, in the end, a business (like practically everything else) is only worth what someone else is willing and able to pay for it.
When I’m seeking to buy a business, the value figure I arrive at (as well as my overall degree of interest) is impacted by a variety of factors, not simply a formula. But that’s a topic for another time.
Here are a few of the most popular approaches…
✅ Price-earnings ratio
This is the cost of the company divided by its earnings. A greater ratio at the business or sector level shows that investors are prepared to pay more for the company’s earnings, and hence the company is more valuable.
✅ Entry costs
If the start-up expenses to establish a similar firm from scratch are high, the barriers to entry are sometimes considered in the valuation.
✅ Discounted cash flow
This represents future predicted cash flow, taking into account the business’s risk.
✅ Asset valuation
This entails assessing the worth of the company’s assets, including tangible assets like property and equipment and intangible assets like patents and copyrights.
✅ Comparables
Similar businesses in the sector that were previously sold may provide helpful valuation comparisons.
Business valuation is not a precise science. Any strategy has limitations, so be flexible in your approach.
Also, be mindful that requesting your company’s valuation from a third party with a financial interest in receiving upfront fees (such as brokers looking for listing fees) may create unreasonable expectations and may actually impede the sale of your company.
