A business valuation is an approach that determines the value of an organization. It’s crucial to report on financials, dividing shareholdings and selling a portion or all of your business, creating succession plans and obtaining funds.
The value of a business can be determined by its assets, earnings, or market potential. The most widely used methods of valuing a business include the multiples of earnings or times-revenue technique, and the discounted cash flow method.
The method of multiplying your company’s revenue or earnings by an industry-standard multiple to arrive at a value. This is a useful method of estimating the value of your business, however it’s not always the complete picture. A restaurant that makes $250k per year, and is valued at five times that amount, could be worth more if it’s run by a strong brand or a excellent dining experience.
The book value formula is another method that is used widely. This method adds up your total business assets including equipment inventory, real estate, and inventory, and subtracts liabilities, which are outstanding loans and debts. This method is quick and simple, however it may not reflect the true worth of your company, especially if you are looking at the possibility of growth. Buyers and investors tend to be more interested in your future potential profits than your current assets. This is why it’s a good idea to conduct a full valuation, for example by a broker or business appraiser prior to seeking investment from an outside source.