How much is a company worth? To find the answer, you may need to look at several things - like the intention of selling the business, the dynamics, tracking progress, or even understanding personal financial standing. Then, it's easier to understand what the areas of improvement are and the weaknesses.
Wondering how to figure out the value of a business? There are a few common approaches that can help you in the valuation. Here are a few.
The Market Itself
It might happen that the company valuation is higher than what's estimated through this comparison. Well, that's where the multiples come into play. A buyer will offer more than the $5 devised by the comparison method if your business shows growing trends in the future.
You need to understand the market and what it will be in both the near and long term to understand the valuation. Reading the markets wrong can result in wrong decision-making — something you may not be able to afford as a business.
What about the Business Assets?
This method is probably the simplest of all. You will need to find the value of all the different types of assets and liabilities. Assets are the value-adding properties that your business owns. Liabilities are what you can call debts - you subtract them from the net value of your business.
But how to estimate the value of a business by calculation of assets and liabilities? Well, you might need a professional at this point to do the maths. The lowest book value, for instance, is the minimum selling price you might go for.
Based on Income
Buyers who want to reduce the competition or expand their reach in a specific locality often go for the purchase of smaller businesses. They usually take loans to buy a small-scale business after reviewing its value. In such cases, the business's worth depends on its ability to pay off the loan in the future.
The seller would need to provide financial data and profit-loss statements of previous years to ensure that the purchase is profitable for them.
In this method, simple projections of net profit and income incurred by the business are made. The value of a company is calculated based on these future predictions. If the company is earning more or has less debt, that's a good sign for sure. It shows how robust the entire company is.
From the Buyers Perspective
Now, how to value a business for investing or buying? You need few documents to get started, like the business's SDE and discretionary cash flow records.
Additionally, do not forget to review the proprietary documents, personal finances, tax filings, and statements of profits and losses in the previous years before making a purchase. A seller might ask for your financial records as well; make sure you have them optimized beforehand.
Knowing what a business is worth requires a lot of complicated mathematics, and at some point, you might feel like hiring an expert to help you out. You can get in touch with an appraiser to simplify the entire process and provide you with accurate numbers.