How to Know The Value of Your Business? Business Worth Calculation

How to know the value of your business? Business worth calculation; Regardless of the interest in selling a company, assess how much it

Updated on July 25, 2022
How to Know The Value of Your Business? Business Worth Calculation

How to know the value of your business? Business worth calculation; Regardless of the interest in selling a company, assess how much it is worth to the entrepreneur in several ways. This process, called appraisal, follows a set of techniques and procedures to determine the company’s value in the market and define a return forecast for those who wish to invest in the business.

How to Know The Value of Your Business? Business Worth Calculation

How to Know The Value of Your Business? Business Worth Calculation

The assessment requires knowledge of the market and sector and specific technical attributes to be carried out. However, how to know the value of your business? For that, you can also be using a business valuation tool. So, let’s understand a little more about business worth calculation.

What is a business appraisal?

Valuing a company is the process of determining its economic value of a company. Analysts will use company leadership, the current market value of a company’s assets and future earnings to determine the valuation.

It’s a good idea to conduct a business assessment regularly, as this can help you identify ways to improve your business. But a business appraisal can also be used in exit strategy planning when you are getting ready to sell a business or looking for financing.

What is the advantage of knowing the value of your business worth calculation?

The value of a business is essential information when an owner is considering selling a business. Attempting to successfully negotiate a deal without first understanding the value of your business can put you in a losing money position.

So, many small business owners neglect to calculate the value of their business, but you can quickly fix this omission. If you’ve invested countless hours in your business, talk to a business appraiser or consultant. They can help you determine your business value.

Many business owners hope that the proceeds from the future sale of the business will fund their retirement, owner and CEO of Financially Simple. However, most do not formally evaluate their business until they are ready to sell. As a result, many people are surprised to find that they are not creating enough value in their companies to meet their retirement goals.

A business appraisal can help you plan for your future as you prepare for retirement.

If you wait to assess the value of your business until you want to retire or need to retire, you won’t have time to increase the value of your company. Then, of course, you will only get what you can get. Still, suppose you know the value of your company in advance. In that case, you can work with professional advisors to increase the value of your capital – your cash flow, your tangible and intangible assets – which will then increase the value of your business. Value of your business.

What are the different methods for determining the valuation?

Most investors use three main strategies to determine valuation: comparable transactions, precedents, and discounted cash flow analysis.

  • Comparable Analysis: This valuation method measures a company’s current value by looking at metrics from other companies in its industry. Comparative analysis is a relative valuation format that looks at a company’s size, stock price, market capitalization, and profit before interest, taxes, and depreciation (EBITDA).
  • Preceding Transaction Analysis: Preceding transaction analysis is also a form of relative valuation. He compares the business with other companies in the industry that have been sold recently. However, values ​​can quickly become outdated over time.
  • Discounted cash flow analysis: Compared to the other two valuation methods, discounted cash flow analysis (DCF) is a form of internal valuation. DCF analysis measures the value of a company based on its expected future cash flows.

What are the different methods for determining the valuation?

So, in addition to using specific formulas to calculate enterprise value, and must understand some key business areas.

  • Tangible assets: Tangible assets include machinery, property, and inventories. It is easy to calculate the value of tangible assets.
  • Intangible Assets: Intangible assets include brand awareness, trademarks, and patents. These assets can bring tremendous value to your business, and you need to know the monetary value of intangible assets.
  • Liabilities: Business liabilities consider in your assessment, including any debts your company owes.
  • Financial Metrics: Is your business profitable? If so, what is your annual profit? How much revenue does your company generate? Get a thorough understanding of your financial statements because potential investors or buyers will want to know your financial situation.

Knowing your company’s assets is an added benefit of a company valuation. By looking at tangible and intangible assets, you’ll understand what makes your business valuable and what those assets are worth.

So, knowing the value of your business can provide more information about future business decisions, even if you are not selling your business. And for example, do you have a lot of money in your inventory? This awareness may change the way we approach the inventory process in the future.

How to calculate the value of your business

The value of your business’s worth calculation depends on several factors, including its size, its team, its expected growth, and a plethora of other elements.

Some formulas are regularly used to calculate the value of a business. However, the exact procedures vary by company, and business valuation is far from a precise science.

Unfortunately, if we have ten different people in a room trying to determine a price for our business, we will likely get 11 different responses.

EBITDA multiples

So, according to Jeff Rasmussen, founder of Fairway Business Advisors, the EBITDA multiple methods is one of three standard formulas for calculating corporate value. There are three main ways to calculate a company’s value: revenue multiples, adjusted EBITDA multiples, and discounted EBITDA cash flows.

Multiples are decided by several factors, including the industry, the size of the business, and the company’s growth. The multiple changes of a company over time. To calculate a corporate multiple or EV multiple, you perform the following calculation:

EV ÷ EBITDA = company multiple

EV is calculated by adding market capitalization, liabilities, minority interests, and preferred shares. Then withdraw the money. A multiple of the following companies means the company undervalues, informing potential investors or buyers. This calculation is mainly used for large companies and shouldn’t draw much attention from smaller organizations.

Compensation method

Comparing your enterprise to others on your enterprise is any other manner to get a correct concept of ​​your value. 

For small businesses, I might advocate the use of the comps method. First, try and discover an enterprise like yours that has been offered or acquired funding. Then, follow that a couple of in your sales.

Sometimes commercial enterprise agents may be helpful in this, and every so often, common multiples are posted. If you can’t locate comps, I recommend you seek advice from a professional. 

However, be cautious approximately depending on an excessive amount of formulas, as they do not continually inform the complete story.

A failure in the use of formulas can be demonstrated as follows. Company A had an average EBITDA of US$ 1 million in the last five years. So, company A owns a taxi company in a city that has aggressively opposed the use of Uber. However, the political climate has changed, and Uber is about to enter your city.

And company B also has an average EBITDA of $1 million over the past five years. Company B is a pharmaceutical development company. They have just had their latest drug approved by the FDA and expect to quadruple their EBITDA. So, both companies have the same amount of EBITDA. Are they worth the same amount? Certainly not.

Market method

So, let’s focus our time and effort on this method. And it’s quick and easy to understand, and you’ll know in five minutes how much your business is worth (or at least a broad range). The basic premise is to look at companies similar to yours in size, revenue, and other successfully sold characteristics. Then, the value of your business is tied to that value.

Let me give you a simple example. So, once you get the math down, you can apply it to your own business.

Let’s understand what SDE

First, let’s understand what SDE is. If your income statement shows you have $100,000 in net income, you need to “re-add” some items. This includes personal, discretionary, and one-time expenses and the owner’s salary.

Let’s say your annual salary is $50,000. On the advice of your CPA to reduce your taxable income, you use the company to pay for your home health insurance, auto, gas, and auto insurance. In addition to superannuation contributions, you have some depreciation and interest. Let’s say all these costs add up to another $50,000.

Here’s the math:

  • Net income: US$ 100,000
  • Owner Salary: $50,000
  • Additional expenses: $50,000 (these must be documented and justified)
  • SDE: $200,000 ($100,000 + $50,000 + $50,000)

Now for the review:

  • SDE: $200,000
  • Market multiple: 2.28
  • Fair Market Valuation: $456,000 ($200,000 x 2.28)

Here it is. All you need to do to determine the value of your business quickly is to calculate the SDE and multiply it by the industry’s average market multiple.

It is critical to determine your market multiple, and having access to completed transactions is vital in this research. So, you will likely need to consult a business broker with a Certified Commercial Intermediary (CBI) designation or a mergers and acquisitions specialist.

Both professionals can research the average market

Both professionals can research the average market multiple for their industry and adjust it up or down based on their company characteristics and circumstance.

This requires extensive training and professional standards to determine. So when it’s time to list and sell your business, don’t rely on 2.28 just because it’s the market average. Instead, contact a professional for detailed help.

And once you know how much your business is worth, you can determine whether it’s time to sell your business and cash in immediately or build a higher valuation in the future.

Here’s the fun part: In the example above, your business is worth $456,000, but you want to sell it for $750,000. Just push the numbers back, and you’ll know exactly what you need to show in the annual SDE to justify a $750,000 valuation.

Here’s the math:

  • Target sale price: $750,000 divided by 2.28 = $328,947
  • Current SDE: $200,000
  • SDE Objective: $328,947

Over the next few years, work your company’s annual SDE to increase by $128,947, and you will justify your $750,000 valuation.

Knowing the value of your business

It’s a good idea to know the value of your business, and there are a few different ways to come up with ratings. So, whichever method you use, update your business worth calculation annually and speak with a professional business appraiser to get the most accurate valuation possible.