If you're thinking about selling your business, you likely want to know how much it's worth. But that's easier said than done because there are so many factors that go into determining value. To help, we've compiled some tips from experts on How Do You Value A Business and avoid common mistakes along the way:
Decide how you want to value your business.
The first step in determining the value of your business is deciding how you want to value it. There are two main ways to do this:
Market Value - This is the price that a willing buyer and seller would agree on if they were both aware of all relevant facts and able to negotiate freely.
Book Value - This is the price that can be determined by subtracting assets from liabilities.
Don't use a multiple of earnings. This is one of the most common mistakes people make when determining the value of a business. There are several reasons to avoid this approach, but here's the main one: If you were to buy an entire company, it would be at a different price than just purchasing part of that company.
So why would you want to pay for all assets together by using multiples? The answer is simple: You shouldn't value a business not simply the sum of its parts. A business that is profitable and has a strong brand can be worth more than one with the same assets but no brand. The same is true for businesses that rely on proprietary technology or patents, as these can be difficult to replicate by competitors.!
Avoid valuation methods that ignore industry standards.
Valuation methods that ignore industry standards can produce inaccurate valuations. For example, valuation experts generally recommend that buyers and sellers use discounted cash flow models to determine a business's value.
Discounted cash flow models are based on the principle that a business's value is equal to its earnings less the cost of capital required by investors—and thus include all factors related to financing decisions (including debt) as well as operating performance. However, some businesses may operate in markets where large amounts of debt are not available or advisable; in these cases, using a discount rate based on market interest rates might lead to an inflated appraisal price for your firm.
Create an accurate view of potential growth.
In our view, growth potential is the difference between a business's current state and its potential. In other words, it's the amount you could grow your company if all goes well. That's why it's important to create an accurate view of potential growth when determining a business's value.
To do this, you need to have a clear idea of the business's current state—in other words, what the company looks like now that it has been up and running for some time. Once you have this information in hand, compare it with estimates about what your firm will look like in future years if all goes well (or badly).
Conclusion
When you’re ready to sell your business, it’s important to How Do You Value A Business. The key is knowing what information will give potential buyers an accurate picture of the value of your business, and how much they stand to gain by purchasing it.
If this sounds like a lot of work, don’t worry—we have plenty of resources to help you get started!
