You may want to know the value of your company for many different reasons, but you most likely want to know because you’re thinking of selling it. In that case, if you’re selling your business, there are two things you must do: determine why you need a business valuation and gather all the required information.
Considering only 47% of Americans have trust in their bank, you may benefit more by calculating the value of your business using on your own using a business valuation tool or business valuation services. There are three approaches you can use for small business valuation: compare recent sales of similar businesses, base your company’s value on its ability to make money and risk assessment, and base the value on your company’s assets.
This small business valuation formula involves adding up the sum of all the parts of your company and is often seen as the easiest way of calculating a company’s value. That’s because the approach simply adds up all the assets, depreciates them accordingly, and determines the number value.
It starts with the physical assets including office furniture, machinery, computers, and inventory. New businesses may not have many, but they should still include them.
Once you have the physical assets calculated, move on to intellectual property such as trademarks, patents, and even incorporation papers. The value of the assets can greatly contribute to your company’s value.
This method involves calculating a company’s future revenue and discounting it — at some rate — to arrive at their value. This method is a little more complicated, as it applies multipliers to EBIDA (Earnings Before Interest, Depreciation, and Amortization) as well as many other techniques that stock analysts use to value public companies.
By comparing your business to others of the same size in the same area and industry, you can also find out how much your company is worth. Thinking in terms of the bigger market serves as a good rule of thumb. The higher the growth projections, the more your business is potentially worth. This is considered the most subjective of the three methods because it is difficult to factor the size of the opportunity and the conditions of the market.
Now that you know how small business valuation works, you are in a better position to decide whether or not to proceed with the selling process. What will the future hold for your business?