The Basics of Calculating How Much a Business is Worth

In case you are looking for investors for your business, or you want to sell your business, then determining its value becomes important.

Irrespective of whether you’ve been running your business for a decade or a few months, you are likely to find yourself needing to determine your business value eventually. You may need to know it because:

• You are ready to sell your business.

• You are looking for investors for your business.

• You want to sell company stock.

• You are thinking of getting a bank loan against your business.

• You want to understand how well your business is growing.

Most business owners decide to value their business when they are looking for investors. If you are looking to get a loan or get investments, then your business valuations become very important.

How do you calculate the value of a business?

If you are wondering how you can value your business, then read on.

1. Ignore capital assets 

When you are wondering, ‘how can I value my business?’ The first thing you’ll need to do is to know the difference between asset value and business value.

Your business valuation is not exactly what worth your business has, but rather what amount of money is tied up in the business. A potential buyer doesn’t want to know how much they are likely to make by selling your business.

What they want to know is what the value of the products and services being provided by the business is. If they purchase your business, this is what they’ll sell your products or services.

2. Business profitability 

When you are defining the value of your business, you’ll need to measure your profits. Your business valuation should show how much your business is making at the present, as well as how much it is likely to make in the future.

When you calculate the gross income as well as outgoing payments, ensure you include your salary in that. Your salary, here, is what your basic operating wage is. You’ll also need to keep your financial records ready. Using your historical data, you can create a financial model for your business.

Take for example how your business isn’t likely to generate the same profit every year. Using your historical data on profits made, you can better understand how your business is doing, how the market is growing, as well as how your competitors are progressing.

3. Calculating the business value 

Whether you are valuing a small business or a large business, you first need to calculate your net income. To calculate what your net income is, subtract your expenses from your net profit.

Then, you’ll be looking at multiples. This is the longevity meter of your business. It shows how long your business is likely to continue to grow. It depends on several factors like the size of the business, and the risks involved with running that business.

You’ll need to do your research on your industry, the financial history of your business, and whether your business is stable or not. Look at whether there is any guaranteed income coming in, as well as how large the customer base is. Essentially, you are trying to ascertain whether your business will continue to operate even after you sell it.

You’ll also need to know who your target market is, and use that information to determine what your rate of market growth could be. Using all this information, you can make growth projections for your business. This data can help potential buyers decide if they want to buy your business.

4. Market valuation 

When it comes to how to value a business, market valuation becomes important. By this point, you should already have your business valuation ready. But your market valuation is just as important. This is as the value of your business is ultimately dependent on its market value.

The market is what is responsible for dictating the value of your business. So even if you’ve valued your business at $1.5 million, but the investors don’t agree, then your business isn’t worth $1.5 million.

Ultimately, it will be the people buying your business or investing in it, that will determine what the worth of your business is.

5. What the market wants 

The value a company has is ultimately dependent on whether the market supports that value or not.

If a potential buyer doesn’t agree with your business value, and you don’t compromise, then making a sale might be more difficult for you. There are times when you may have to compromise on what your business value is, based on what market value it has.

How to determine a company’s value and worth?

Here is how to calculate how much a business is worth:

• Ignore the capital assets of your business.

• Business profitability.

• Calculate the business value.

• Know the market valuation of the business.

• Know what the market wants.

Knowing what your business value is can be important when trying to project future growth rates, or even when trying to sell a business.

Should you be looking for investments or bank loans against your business, then its business value becomes important as well. This guide can help you learn how you can determine your business’ value.