How much is your business really worth?
When it’s time to sell your business to fuel your retirement or next adventure, establishing its market value is essential. This involves a multifaceted approach, beginning with an asset tally – calculating the total value of your business’s assets, subtracting any liabilities, to give a baseline figure. Yet, the true worth often exceeds this sum, and is influenced by factors such as annual revenue, which, when compared to industry standards, can offer a multiplier effect on valuation.
There are several methods that can help you estimate how much your business is really worth, depending on the type and size of your business, the industry you operate in, and the purpose of the valuation. In this essay, we will discuss four common ways to value your business: tallying the value of assets, basing it on revenue, using earnings multiples, and doing a discounted cash-flow analysis.
More than a simple calculation
Valuing your business is not an exact science, but rather an art that involves using different methods and factors to estimate how much your business is worth in the current market. To do an assessment, consider the following methods:
- Asset Valuation: Calculate the value of your company’s assets (equipment, inventory) and subtract any liabilities or debt. This gives a baseline value, but the actual worth of your company may be higher.
- Revenue-Based Valuation: Multiply your annual sales using industry benchmarks to estimate worth, such as a multiple of sales (e.g., two times sales).
- Earnings Multiples: Apply a price-to-earnings (P/E) ratio to projected earnings for the next few years. For example, with a P/E ratio of 15 and earnings of $200,000, the value could be $3 million.
- Discounted Cash-Flow Analysis: Project your future annual cash flows and discount them using a “net present value” calculation that reflects the expected return and risk. Since this is a complex formula, you can use an NPV calculator, which is easy to find online.
Finally, go beyond financial formulas. This means looking at other factors that might affect the value of your business, such as its geographical location, competitive advantage, customer loyalty, intellectual property, social impact, and its strategic value to potential buyers. These factors are often qualitative and subjective, but they can make a significant difference in the perceived value of your business. Therefore, it is important to consider them in addition to the financial formulas, and to communicate them effectively to the potential buyer.
The right approach
Selling your company can be a life-changing decision, as it can provide you with financial security, personal freedom, and new opportunities. However, determining the value of your business is not as simple as putting a price tag on it and handing over the keys. You also need to prepare your business for sale, find the right buyer, and negotiate the best deal. To do so, you need a CPA firm for businesses that companies rely on.
GYL offers comprehensive and customized services in accounting, audit, tax, business advisory, financial planning, employment search and organizational problem solving. We are business people first and accountants second, cutting through accounting jargon to deliver tailored solutions for every client. Whether you want to retire, start a new venture, or pursue a different passion, let us help you achieve your goals and dreams.