How to Value a Business

Do you know how much your business is worth? You should, even if you’re not planning on selling right now. Knowing the value of your business gives you the power to make confident decisions about the future, both yours and that of your business.

Your starting point is determining that value.

How Much is Your Business Worth?

There are a number of moving parts to figuring out how much your business is worth, but these three basic methods can help you determine how to set your sale price fairly:

  • Your profits or cash flow

Think about how readily your business generates profits or cash flow, then project likely profits over the course of the next five years or more. This will give you a rudimentary business value.

Discounted future earnings should be useful to help you figure out the “time value” of the figure you arrived at, meaning cash or profits received in year number five may be discounted based upon projected interest rates.

  • Your sales

Depending on the industry you work in, you can arrive at a business value figure by multiplying a specific number and your current annual sales. This will give you a specific figure.

Depending on your exact industry, your multiplier will change; it may decrease, for example, if sales have not been steady, or increase because they have remained steady or gone up year-to-year. If sales have come mainly from one client, that will negatively impact the multiplier you’ll use because of the increased risk you present to a potential buyer.

  • Your assets

If you’ve had a tough year or two and your cash flow or profits aren’t healthy enough to arrive at a sales price based upon the previous methods discussed, you can use your “tangible assets” to assign a value to your business. Tangible assets basically place a price on every item of worth on your company’s balance sheet.

(Note that this business valuation method is a last resort as it gives you a “rock bottom” price. You would not be advised to do this if your business were healthy and doing well, however it’s worth being aware of).

“Intangible assets” can also be used in a valuation. Your recognition, customer loyalty, patents, trademarks, etc. can be included as business assets and may increase your selling price. However, buyers will often disagree on the price you arrive at based upon their purported value. Rely on experts’ help and your own best judgement to decide whether these should be included in the valuation.

Building Sellability

Finally, once you’ve determined your business’s worth, repeat the process every so often if you’re not selling immediately. This can be useful as it forces you to evaluate your business’ worth regularly and improve it if needed. More importantly, you’ll know what you’re doing when you decide to sell, so that you get the sale price you need.

Arriving at a value for your business is one thing but proactively building sellability in as early as possible is key.