A business valuation should tell you what your company would be worth if you sold it to a buyer. But, if you make a mistake when calculating your valuation, it’s easy to overestimate or underestimate your worth.
That’s why there are several different methods for calculating the value of a business. The one you use will depend on the nature of your company.
If you’re really looking to calculate an accurate valuation, you can try using more than one of these methods.
1. Asset Valuation
The assets of your company are both tangible and intangible. To estimate their value, look to the market for comps.
To use an asset valuation model, you will need to consider all of the cash, equipment, real estate, inventory, stocks, patents, trademarks, and customer relationships your business has.
It can be time-consuming to calculate each aspect and there are a lot of aspects for consideration. If you haven’t performed an asset valuation of your company before, you should reach out to a professional for help.
2. Historical Earnings Valuation
The longer your company has been in business, the more likely you are to be able to use a historical earnings valuation model.
This approach considers the gross income of your business, your company’s ability to repay debt and your current cash flow and earnings. If your business isn’t able to pay its bills on time, then that will be reflected in its value.
On the other hand, if you do pay back debt quickly and have positive cash flow, your company will be worth much more.
3. Relative Valuation
While the relative valuation method is one of the easiest to perform, it isn’t very accurate. It involves looking at other businesses that have recently sold and comparing your company to them.
The reason that this doesn’t work very well is that every business is so different depending on its size, where it’s located, how many products and services it offers, what its assets are, and how it is set up. Since most companies don’t make all of their financial information public, it’s difficult to know if you are making a true comparison.
Even if it seems like another business is very similar to yours on the surface, they could have an entirely different financial system than you.
Relative Valuations are best used in the negotiating process as a way to communicate what similar assets are selling for in the marketplace.
4. Future Maintainable Earnings Valuation
When you are selling your business, you’re really selling its future profitability. One of the most accurate ways to value your business is by looking at your records of the past three years and then project what your earnings will be in the future.
In order to use this method, you need to have a business that has a steady amount of business and be confident that this cash flow will continue.
For the Most Accurate Business Valuation
The key to coming up with an accurate business valuation is using multiple models and comparing the results. Make sure you attempt a calculation with multiple methods on this list.
Another important factor in creating an accurate valuation is experience. When you work with a business broker, they can help you understand what your company is worth in a variety of different situations. Contact me today for a free consultation.