Valuing your company is an important step in understanding your business’s financial health, which is something we should probably look to do more often. Valuing your company isn’t just an exercise for those looking to sell; it has many benefits including:
- Understanding current performance
- Predicting growth
- Putting a value on your time and effort
- Exploring what strategies are working (or not)
There are a variety of methods you can use to determine the value of your business, including a discounted cash flow analysis, asset-based valuation, or a market-based approach.
Each method has its own strengths and weaknesses, so it’s important to understand which approach will best suit your needs.
What affects the value of a business?
The size, assets, profitability, competitive edge, customer base, market position, and industry trends are just a few of the variables that determine a company’s worth. The value of a firm can also be significantly impacted by other elements like the state of the economy, governmental regulations, and technological developments.
Ways you can value your business
Asset valuation
An asset valuation may be the best way to understand the whole value of your company if it has significant assets.
Assets come in two different varieties: tangible and intangible. The physical items that belong to your company, such as your office space, inventory, land, and equipment, are known as tangible assets. Any non-physical assets, such as your company’s brand, reputation, and intellectual property, including copyrights and patents, are considered intangible assets.
You deduct the costs of your business liabilities (such as debt and outstanding credit) from the total worth of your tangible and intangible assets to arrive at your company’s Net Book Value (NBV).
Because this approach ignores “goodwill” toward the company, which is a technical accounting term for the gap between a company’s market value (what people are ready to pay for it) and the value of its net assets, asset valuation frequently produces the lowest value for a business (assets minus liabilities).
Industry best practice
Different industries have different needs. Additionally, some enterprises may be bought and sold more frequently than others.
There may be specific guidelines that you may use as a roadmap to help you through the business valuation process in the sectors where business sales are common, such as retail, where business turnover, client volume, and outlet count are major indicators of worth.
Entry valuation
The goal of entry valuation is to ensure that the company is not overvalued or undervalued, which could lead to financial losses; it’s a framework that explores how much it would cost to establish a similar business.
A good way to get an accurate estimate is to create a list detailing start-up cost, the price of acquiring tangible assets, employing and training staff, establishing a customer base, and developing products and services.
You would use this process to determine the value of a business before it is acquired, merged, or taken public. It typically involves analysing financial statements, evaluating market conditions, and assessing the competitive landscape to establish a fair market value.
Discounted cashflow
This valuation method is one the trickiest as it looks at the cash a business generates and discounts it back to the present day to arrive at a value. It considers the time value of money and takes into account the cost of capital, the company’s risk profile, and the growth of the company. It also considers the company’s expected future cash flows and the cost of capital.
Despite it being quite tricky, this is the most common method used to value companies and is widely accepted by business analysts and investors.
Comparable analysis
Essentially, this method looks at what businesses, that are like yours, have been sold and for how much. Comparable analysis gives an observable value for your own business, based on what rival or similar companies are worth at present.
So, there you have it! Different ways of valuing your business. While some are more complex than others, they should give you a starting point when it comes to thinking about your business and what it’s worth, especially if you are ready to grow (and not simply sell).
Additionally, you may want to consult a professional business appraiser to get an accurate valuation.
Ultimately, valuing your company can help you make more informed decisions about strategic investments and long-term planning. If you’re anything like me, you’re in this for the long game and despite economic ups and downs, you’re ready and enthused to add value to your business in every way possible.