Valuing a business can be tricky. Speak with an appraiser and you’ll learn that there are many factors that play a role in determining the value of a business. With no set formula or secret to calculating this value, what’s the best way to go about it? Conferring with an investment banker or business appraiser is going to be the best way to determine your value. You will want to do this at least once a year to ensure that your company is on the right path . As a business owner, you have a lot on your plate. Finding the time to calculate the value of your business isn’t something that most people have. However, it’s an important responsibility that all business owners need to think about. You might be thinking that the last thing you plan on doing is selling your business. Still, you should know what your business is worth just in case that day ever comes. So join us as we explore the best way to value your business.
The biggest reason is so that you know what it’s worth in case you need to sell. And while selling your business might sound crazy at the moment, you never know what kind of opportunities may come your way. Plenty of business owners have been presented with incredible offers from investment companies and decided to sell. Conversely, if you get to where you can no longer feasibly run your business or you just want to retire on a beach somewhere, knowing your value will make negotiations go much smoother. The last thing you want to do is lose money on the business that you worked so hard to build. You want to get the best deal possible, and knowing what you’re worth will ensure that you don’t get sidelined by a low-ball offer and regret it later. As such, you need to speak with a business appraiser or advisor so they can help you to better determine what your business is actually worth.
While there are specific formulas in place that will help you calculate your business’s value, you should be well-versed in some key areas of business. Let’s take a moment to talk about these areas. Tangible Assets These are things like inventory, machinery, and property. As you can imagine, it’s pretty easy to calculate the total sum of your tangible assets. Intangible Assets These are things like patents, trademarks, and brand recognition. Although not as easy to calculate compared to tangible assets, you should be able to determine the value of intangible assets with a little research. Liabilities Debts that are owed by your business will also factor in its total valuation. Financial Metrics This has to do with the kind of revenue your business brings in. It’s important to know your financial records and statements like the back of your hand. Buyers and potential investors are going to want to know where you stand financially. If you aren’t profitable, your chances of getting a fair price are slim to none. Even if you aren’t interested in selling your business at the moment, knowing its value can help you exponentially. If you find that your value is slipping, you can use this information to make adjustments so that you are more profitable. Business owners need to know where they stand financially so that they can make the most of their business and improve sales. If you’re in the dark as to how valuable you are, you won’t have a baseline to help you improve operations.
The value of your business depends on several factors, such as your size, team, projected growth, and more. Although calculating a business's value isn’t an exact science and it varies from company to company, there are some formulas that are regularly used. However, it is important that we first define SDE ( seller's discretionary earnings ), as well as EBITDA (earnings before interest, depreciation, and amortization). SDE is going to be your business's net income before you deduct your owner's salary. Other non-operating and discretionary expenses will be added back into the calculation. Figuring out EBITDA is pretty straightforward, as these are things that go directly into the calculation. Typically, SDE is used to figure out the value of small businesses, whereas EBITDA is usually used for larger businesses. There are some industry-specific multiples that go into both the SDE and EBITDA method of determining a business's value. These multiples differ from industry to industry and are largely based on specific trends. You should talk to a qualified business appraiser to help you come up with the correct multiples for determining the value of your business based on the industry that it is in. This will ensure that you come up with an accurate assessment of your business’s value. Without the proper multiples, you will get inaccurate data. You will likely use figures that don’t apply to you, causing you to calculate incorrect figures.
Remember, these multiples depend on the industry, the size of the business, and its growth. What’s more, a business's multiple will change over time. To calculate an EV multiple (enterprise multiple), you will need to perform the following calculation: EV/EBITDA = Enterprise Multiple You can figure out your EV by adding the following components:
Once you have added these together, simply subtract cash. The enterprise multiple consists of information that possible buyers or investors want to know about. Low ratios can mean that a business is undervalued. This calculation should be used mainly for bigger businesses. You can also use the data from another business within your industry that focuses on the same product or service. It’s a great way to get a ballpark figure of where you stand in your valuation. You want to look at businesses like yours that have been sold or are getting funding. Use their multiple to help you find out where you stand in the same industry. If there isn’t a similar company to base your value on, you should consider hiring a professional consultant to assist you in determining your value.
If you’re concerned with how your business will look to potential investors, it’s important to calculate your value in a way that will appeal to buyers . If you’re calculating the value of your business for your own purposes, you can use a few different formulas to get the information you need. Doing this will make it easier to find what aspects of your company can be tweaked to your advantage. What’s more, you can calculate your value at your discretion since you don’t need to know its value for negotiating purposes. If you reach a certain period in operations and you would like to expand, knowing the value of your company will make it easier to formulate decisions as to where you need to grow your business .
It’s always going to be easier to determine the value of a business that’s been around for many years. There are years of history to research and just as many years of financial reports to fall back on. With so much information available, seasoned business owners will typically be able to calculate the value of their company more efficiently. The same can’t be said for a new startup that only has a couple of years under its belt. As such, it may be easier to hire someone to value your new business for you.
Calculating your business’s value should be done at least once every year, especially if you’re not planning on selling. Getting this data will help you make better decisions for your company, such as improving operations or marketing. If you are planning on selling, you may want to calculate your value more frequently, as this will give you a better idea of your value for negotiating purposes. It really comes down to the needs of your business and where you stand on selling it.
If you aren’t already valuating your business on a yearly basis, you should consider doing so right away. You may be surprised to find out what your value teaches you about your business. Many business owners have been able to adjust their operations to bring in more revenue. And as a business owner, that’s what it’s all about. Whether or not you are planning to sell, it’s important to have a firm grasp on the value of your business. Sources https://www.valuadder.com/glossary/sdcf.html https://www.businessnewsdaily.com/4461-ebitda-formula-definition.html https://www.wallstreetmojo.com/minority-interest-guide-examples/