A business valuation is the method of estimating the financial worth of an enterprise. It’s essential for financial reporting, division of shareholdings, selling all or part of your business, establishing succession plans, and obtaining financing.
The value of a firm can be determined by its assets, earnings, or market potential. The most widely used methods to evaluate a company’s worth include the multiples of earnings or times-revenue technique, and the discounted cash flow technique.
The earnings-multiples method or times-revenue considers your company’s revenue or earnings and then multiplies it by an industry standard multiple to arrive at a value. This is a good way of estimating the value of your business, however it doesn’t necessarily provide an accurate picture. For example, a cafe which earns $250,000 annually and is valued at five times its earnings could be worth much more when it has a strong brand and a top-quality dining experience.
Another popular method is the formula for book value. This method tallies up your total business assets, such as equipment, real estate and inventory and subtracts liabilities which are outstanding loans and debts. This method is simple and easy, but it may not be a good reflection of the true worth of your business, especially when you are considering growth potential. Investors and buyers are generally more focused on the potential for future profits than in your current assets. This is why it’s important to conduct a thorough valuation, such as that of an appraiser for business or a broker prior to seeking investment from an outside source.