How to Evaluate a Business Worth
A business valuation is a process that estimates the monetary value of an enterprise. It’s essential for financial reporting, dividing shareholdings and selling a portion or all of your business, making succession plans, and obtaining financing.
The value of a business can be determined by its assets, earnings, or market potential. The most popular methods of valuing a business are the earnings-multiples or times-revenue method and the discounted cash flow (DCF) method.
The times-revenue or earnings-multiples approach takes your business’s revenue or earnings and divides it by a industry standard multiple to come up with an amount. This is a great way to get a sense of what your business’s worth, but it doesn’t provide a complete picture. For instance, a cafe which earns $250,000 annually and is valued at five times earnings could be worth much more than that when it has a strong image and a premium dining experience.
Another method that is commonly used is the formula for book value. This method adds the total assets of your business, such as equipment as well as real estate and inventory, and subtracts liabilities, which include outstanding debts and loans. This method is simple and easy, but it may not accurately reflect the true value of your business, especially if you are looking at potential growth. Investors and buyers are likely to be more concerned about your future profits than the current assets. It’s important to have a full appraisal done by a business appraiser or broker before you make an investment with an outside company.