How Much is My Business Worth?

There are a number of reasons you may want to know the value of your business. Whether it be for selling purposes, like determining a sale price for potential buyers, or simply gauging yourself against the competition, developing a strong understanding of your business worth is crucial. There are numerous factors that go into small business valuation, as well as numerous methods for actually calculating your business’s value. By breaking them down, you can gain a better understanding of the current state of your business and how it may evolve in the future.

What Factors Go into Business Valuation?

Before diving into the many different methods of business valuation, it’s important to cover the key factors that are considered when calculating value.

1. Profit margins

One of the most important metrics lies within a company’s bottom line. In general, a company with a large profit margin will typically command a larger valuation at the end of the day. This is because a higher profit margin typically signals a stronger control over costs, which can help result in a higher EBITDA (earnings before interest, taxes, depreciation, and amortization), and a higher net profit.

2. Industry outlook

No matter how strongly a company performs on its own, being in a failing industry can have a drastic effect on the value of the business. Evaluating the overall outlook of an industry is a key step in your company’s valuation.

3. Staff and management

The staff and management of a company may not seem like they would impact a business’s worth, but the leadership and employees of a company drive the future of a company.

4. Concentration

If a business has too many customers concentrated within a single industry, disruptions to that industry will impact the entire customer base of the business.

5. Historical earnings

Looking at the past earnings of a company is a key step in most business valuation methods, as it can help guide expectations toward future earnings.

The above factors are just a portion of what’s considered when evaluating the current value of a business, but they are some of the most important to look at.

Different Methods for Valuing a Business

After looking at some of the above factors within your own business, you may be wondering how to use them in a valuation process. Below are three of the most common valuation methods for determining business worth:

Asset Approach

As implied by the name, the asset approach is an asset-focused take on calculating business worth. This value is determined by subtracting the total liabilities of a company from its total business assets. This includes both intangible assets and tangible assets and is particularly useful for organizations that may eventually require liquidation.

Income Approach

Under this method, a business is valued at the present value of its future earnings or future cash flow. This calculation is completed by taking the future projected earnings of the business and then adjusting those projections for taxes, costs, growth rates, and a number of other factors. A drawback to this approach is that it relies on estimations rather than actual figures. The capitalization of earnings method and discounted cash flow method are the two most common types of income approaches.

Market Approach

Finally, the market value approach to business valuation focuses on taking the value of recently sold comparable businesses and assets. These comparisons are then adjusted for different quantities, quality, or sizes of goods with other companies. Typically, the strategies used for a market approach to valuation are public company comparables, which look at similar metrics from publicly traded companies, or precedent transactions, which look at observed transactions in the same industry as the company.

Schedule a Business Valuation Today!

The intricacies of business valuation can be difficult for even the most experienced business owners and entrepreneurs, and an inadvertent sense of bias can influence anybody’s valuation of their own business. Given this attachment and the challenges that a business owner can face, receiving a professional valuation is always an excellent idea. Here at Sunbelt Business Brokers, we understand the importance of an accurate valuation. Contact one of our Sunbelt Business Broker offices near you today to schedule your valuation!