All kinds of things come in to play when you try to figure out how much a business is worth, but there are two key things to keep in mind when figuring out how to value a company.
One: why do you need to know? Business value isn’t an absolute measurement. I might be calculating my business worth for one reason, and you might be calculating your business worth for a totally different reason. The results will undoubtedly be influenced by our different reasonings, which will determine how we each measure business value, and under what circumstances we set out to do it. These elements are generally known as the standard of value and the premise of value.
Standard of value is a comparison-based value — basically, fair market value. And premise of value has to do with what you’re planning to do with the business — liquidation, or business as usual (going concern).
Two: what do you need to get? You’ll need a few different types of information before you can reach an accurate valuation for your business. Unsurprisingly, business valuation is basically an exercise in economic analysis. That means the company’s financial information plays a key role in the process, and are essential business valuation resources. Be sure to have three to five years of income statements and balance sheets, especially if you’re looking to conduct a small business valuation.
Now that you have these materials ready, you can begin determining the value of your business with one (or more) of these three methods:
- Look at the recent sale prices of businesses in the same industry, and of a similar size and model.
- Analyze the business’s earning power and conduct a risk assessment — how likely is it that the business will not continue to perform as it has in the past? Is the market particularly volatile? Is the product trendy, rather than timeless?
- Add up the business’s assets — these include property, capital, investments, and equipemnt.
This is by no means an exhaustive list of methods for business valuation, or of the terminology involved, but these basics should get you off the ground and ready to calculate the true worth of your company. If you’re thinking, “Calculating my business worth is going to be impossible!” don’t worry. Understanding the terms means you’re on your way to a clear-headed business valuation and the empowerment that comes with the knowledge of exactly what your business is worth.