A business valuation is a method that calculates the value of an organization. It’s crucial to make financial reports, dividing shares by selling all or a part of your business, creating succession plans, and obtaining financing.
The value of a company can be determined by its assets, earnings or market potential. The most common methods for valuing companies include the multiples of earnings technique or times-revenue method as well as the discounted cash flow method.
The method of times-revenue or earnings-multiples considers your company’s revenue or earnings and multiplies it by an industry standard multiple to determine an estimate. This can be a good method of getting an idea of what your business’s worth, but it doesn’t provide a complete picture. A restaurant that makes 250k per year and is valued five times the amount, could be worth more if the establishment has a strong brand or a high quality dining experience.
Another common method is the formula for book value. This method is based on adding all your assets such as equipment, real estate, and inventory, and removes liabilities that are due debts and loans. This method is fast and simple, however it may not be a good reflection of the true worth of your company, especially in the case of growth potential. Investors and buyers are likely to be more concerned about your future profits than in the assets currently. This is why it’s recommended to conduct a complete valuation, such as that of a broker or business appraiser prior to seeking out investment from outside sources.
