A business valuation is a great way to understand what your business is worth and can help you improve its value over time. Small business owners also complete valuations during exit strategy planning or when looking for funding. There are several methods for determining your company’s value, and you can use one or more types to get a ballpark estimate. In many cases, the valuation method depends on what your investor, lender, insurer, or buyer needs to know.
To calculate your company’s worth, you’ll need financial records and details about tangible and intangible assets. You may also want to understand market conditions and the value of your competitive advantage. Here are five ways to measure the economic value of your business.
Estimate business value quickly with the market method
In Forbes, business broker and appraiser Trent Lee focused on the market method as a five-minute business valuation. This approach looks at what similar businesses recently sold for. Lee’s system uses the seller’s discretionary earnings (SDE) and a market multiple. According to Corporate Finance Institute (CFI), SDE includes EBITDA (earnings before interest, taxes, depreciation, and amortization), one-time expenses, non-related business expenses or income, and adjusted expenses.
Lee uses the market multiple of 2.28 based on BizBuySell data. However, your sales price multiplier may differ depending on your industry and business model, among other factors. You can check sales listings on BizBuySell.com and use the business valuation report to find further details.
Simply multiply your SDE with the average market multiple for a quick business valuation. The result is your estimated fair market valuation. Lee recommends working with a mergers and acquisition specialist or business broker with a certified business intermediary (CBI) designation. These individuals can provide an accurate average market multiple.
[Read more: Ready to Move On? How to Create an Exit Plan for Your Business]
Calculate worth using the asset-based method
Like the market method, the asset-based formula, also known as the book method, is relatively simple. It computes the difference between your assets and liabilities using data from your accounting records. Small businesses may use this method when they want a lower business valuation, such as for tax purposes.
Find out what your business is worth by tallying the sum of your business assets, including equipment, real estate, and inventory. Then do the same for liabilities, which are outstanding loans and debts. Subtract liabilities from your assets to get the book value of your business.
You may need a formal business valuation if you ask individuals or firms to invest in your company or lend money.
Apply the discounted cash flow analysis method
The discounted cash flow (DCF) approach estimates future cash flows and then discounts them to get a valuation for today. A DCF analysis requires you to forecast future cash flows and the end values of assets and investments. You also need to choose a discount rate, which is affected by your company’s risk profile and capital market conditions.
You can predict cash flows if your company has historical financial data. However, this method is trickier for startups that lack cash flow and financial records. A spreadsheet or financial calculator is less complicated than manual computation. But since the accuracy of your valuation depends on your cash flow forecasting ability, you may want to work with a professional.
[Read more: How Do I Prepare To Sell My Business?]
Use a business valuation calculator
Consider using an online business valuation calculator if you want to avoid manual formulas or Excel spreadsheet computations. These tools are easy to use, and most don’t require registration. Simply input your details to get a quick estimate of what your business is worth.
Here are three business valuation calculators:
- Western & Southern Financial Group provides an online valuation calculator that uses the discounted cash flow method.
- Nationwide helps you determine the sale price of your business using a calculator with basic and advanced details.
- Fit Small Business offers a simple three-question calculator for those wanting a rough estimate.
Work with a professional for funding-related valuations
You may need a formal business valuation if you ask individuals or firms to invest in your company or lend money. The American Institute of Certified Public Accountants (AICPA) provides Accredited in Business (ABV) certifications to certified public accountants (CPAs) who meet minimum standards and pass an exam. Search the American Society of Appraisers (ASA) database to find a qualified business valuation expert.
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