3 Business Valuation Methods

What is my business worth? If you own one you’ve probably asked yourself that a few times, which isn’t surprising. After all, your company is likely your largest asset and a big part of your financial future. So, whether you’re raising a new round of funding, applying for a loan, thinking about passing along your business to the next generation or just plain curious, it’s important to know your company’s value.  

Putting a price tag on something that likely took you years of hard work and sacrifice to build isn’t easy. However, there are a few business valuation methods that may help you get a head start as you figure out what your business is worth.  

1. ASSET-BASED BUSINESS VALUATION METHOD

   One of the easiest ways to come up with a quick valuation is by looking at the net value of your assets (buildings, inventory, customer lists or anything else your business owns that can be converted to cash) minus your liabilities (debts). For example, if your business has $2 million in assets and $500,000 in debt, its value would be $1.5 million. One thing that this method doesn’t take into account are intangibles, such as your company’s reputation or the strength of your employee base, which could boost the amount a buyer might be willing to pay for your company.
    

2. CASH FLOW-BASED BUSINESS VALUATION METHOD

   The most commonly used method to value a business is by considering its ability to generate ongoing cash flow or operating earnings into the future. Typically this is calculated using a multiple of EBITDA (earnings before interest, taxes, depreciation and amortization). Typically, the resulting amount is then discounted to take into consideration the time value of money. The multiple used will depend on several factors, including the industry you’re in, the size and location of your business, and any goodwill or intellectual property you may have.
    

3. MARKET-BASED BUSINESS VALUATION METHOD

   Another common business valuation method is to look at the recent sale price of comparable companies that have a similar revenue stream and customer base. While this method doesn’t always provide the most accurate estimate, it can provide a quick ballpark figure of your company’s fair market value as compared to the competitive landscape and current market conditions.  

Of course, there are other business valuation methods. If you’re looking for a general idea of what your business is worth, these are a good starting point. But because there can be so many intricacies to valuing a business, when it’s time to get an accurate value, it’s a good idea to work with an outside expert who specializes in business valuation. 

It’s also a good idea to work with your financial advisor when it comes to making financial decisions that will impact your business and personal finances. A financial advisor can help you when it comes to succession and other business planning. An advisor can help you be more certain that your most important asset will help meet your personal needs and goals and preserve the value of your legacy.