Do you know your business’s economic value? There is a big chance that you have never tried to do it before even after running your business for a few months or even several decades.
At one point or another, it will be necessary for you to know your company’s value in cash. But, how do you do it if you lack financial expertise in the first place?
Whether you are planning to sell your business soon, you want to finance your upcoming retirement, you plan to put up a new venture, or you are in need of more investors, it is a must for you to know its real value. There are several steps on how to estimate how much your company is worth and these include the following:
Calculate the Value of Assets
Start by adding up the value of all the things that your business owns and these include all inventory and equipment. After that, subtract any liabilities or debts. The value of the balance sheet of a business is at least a good starting point to determine the worth of your business. But, there is a possibility that your business is worth so much more than the net assets that it has. You also need to consider your expected earnings and revenue.
Base It on Your Revenue
How much are the annual sales that your business generates? Make sure you calculate this and determine the typical worth of a similar business in your industry for a specific level of sales with the help of a business broker or stockbroker. For instance, this might often be equivalent to twice the amount of your sales.
Use the Earning Multiples
Another relevant measure to estimate the worth of your company is with the multiple of its earning or the P/E or price to earnings ratio. Try to estimate your company’s earnings for the next several years. If your typical price to earnings ratio is P/E with projected earnings of $200,000 annually, the worth of your business would be $3 million.
Conduct a Discounted Cash Flow Analysis
This discounted cash-flow analysis is a rather complicated formula that checks the yearly cash flow of a business and projects this into the future and discounts the future cash flow’s value to today with the use of net present value calculation.
It’s Not Just About Financial Formulas
Never base the assessment of the value of your business on the numbers alone. You might also want to consider your business’s value according to its specific geographical location. Aside from this, you also need to take into account the potential strategic value of the business to a potential acquirer if business synergies occur.
Business valuation is extremely important for buyers and investors. Evidence of value is critical to gain the interest and attention of those who have the financial capital you need and are looking for. If you cannot show the worth of your business to an investor, they will never know the amount of reasonable monetary investment they can make.
Use these tips on how to estimate how much your company is worth.