Understanding Business Valuation
If you’ve asked yourself, “what is my business worth?” then you have come to the right place.
Many many entrepreneurs first type into Google, terms like: “what is my business worth” or “business valuation methods” or even “how to sell my business”. And it’s only natural to want to know “the number” that is what is your business worth.
The Purpose of Business Valuation
The purpose of determining a business’s valuation is to help you as the entrepreneur answer the most fundamental questions:
What is my business worth today?
How much would a buyer buy my business for?
How can I make my business worth more?
What happens if a buyer things my business is worth less?
Are the problems worth fixing today?
And while there are elements of business valuation that you can control, such as improving sales, profits, and efficiency, there are many elements that are out of your control, which are primarily around the overall market demand for your business.
Business Valuation Methodologies
Valuing a small business is a key process that must be prepared before marketing a business for sale to potential business buyers.
On one hand, we need to set a baseline expectation for a listing price.
On the other hand, you likely want to know how much you can sell your business for!
We use a number of valuation methods that are driven by the industry, margins, cash flows, growth rates, and comparisons to peer companies, to develop a valuation range that sets the tone for both your expectations and buyer expectations.
This range is our best expectation of what your business will sell for if you were to list it with us on the open market. The most common business valuation methods include:
Multiple of profits (sellers discretionary earnings or EBITDA)
Discounted cash flows (DCF: For larger companies)
Market comparables or “comps”
Net asset valuation
If your business is operating, profitable, and growing, a multiple of earnings is likely the most relevant valuation metric.
If your business has stalled, shut down, or closed, and doesn’t have impressive profits, you may get the best deal by selling the business’s assets to a buyer who can capitalize on these assets to grow their business.
We work with buyers to determine the most appropriate valuation method that the buyer’s market will support, and, that is in line with market expectations.
Next Topic: The Business Selling Process