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How to Calculate Business Value

| January 18, 2022 | By
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All startups and well-established businesses implement the business valuation processes. The procedure enables firms to discover the actual value of their company.

Business owners who wish to sell their business or investors looking to purchase a company typically calculate business value. However, entrepreneurs also carry out a business valuation to assess the total ROI for the company before growing or expanding their operations.

Certain factors are examined when calculating the value of a business. For instance, you can check the total worth of assets and compare the business valuation with that of other similar companies. Additionally, the magnitude of the expected future cash flow is also considered.

So, whether you want to know the worth of a business to purchase, sell a company, or carry out a routine valuation to see where you stand, it is imperative to understand the process involved in business valuation. This guide will provide you with in-depth information on how to calculate business value.

Why Calculate Business Value?

The business valuation process equips you with in-depth knowledge about your company’s worth. By taking this initiative, you become well-versed in the state of the company’s assets and income values, in contrast to its competition.

Determine the Sales Price for Your Company

Although most business owners carry out a valuation when they intend to sell their business, you can also benefit from a valuation even if you do not have any intention of selling. For instance, if you want to get financing to expand your business, investment bankers, or other lending institutions, will require an estimate of your company’s value.

Get Funding and Insurance Coverage

Suppose you get your business valuation done professionally. In that case, a business strategist will provide you with a near-accurate figure of the business’s worth, which you can subsequently use to acquire insurance coverage. Or use it to obtain additional funding to reinvest in the company. This information can also help you learn about the approximate figure you need to sell your company to make a profit.

Provide Equitable Shares to Each Business Partner

A business valuation can also help you calculate each partner’s share in the business. So, if you decide to dissolve your partnership, a business valuation can inform you about the equal share that each partner deserves.

Offer an Equitable Division of Marital Assets

A valuation can also be beneficial in cases of divorce. The resulting figure can assist in an equitable distribution of marital assets among spouses.

Negotiate the Costs in Mergers

Getting a business valuation done before a merger is also quite helpful. Most corporations take advantage of small businesses by sending out a lowball offer to acquire their assets. With a business valuation, you will gain an insight into the true value of your business, which you can use as leverage to negotiate a fair price.

For instance, if a company offers you a significantly lower amount than the valuation determined, you can confidently reject the offer or start negotiation and mediation to reach a mutually beneficial agreement.

How to Carry Out Business Valuation

There are several methods used to determine the current value of your business. Let’s take a look at some of the most common approaches professionals use.

Valuation by Stock Price

Companies involved in trading can easily determine the market value by examining the stock price. For example, let’s imagine that your firm has 300,000 publicly traded shares, each sold at $10. Considering this, the total worth of the share will be $3,000,000.

While this approach is relatively more straightforward, it is not effective on its own. This is because the share price is built on the company’s perceived value, which is not reflective of its actual worth. Moreover, this approach can only be used by publicly traded companies.

Valuation by Comparison

Another approach is to compare the valuation of similar firms. In this approach, professionals compare the value of businesses in a similar industry in similar geographical locations. This is done by examining the price of recently sold companies or discovering metrics, such as the price-earnings ratio or other available information. However, this approach is also not practical on its own, especially if recent data is not available.

Valuation by Assets

Business valuation by assets adds up the total value of your assets after subtracting the liabilities. This method assumes the business is still running and that you will not be selling any significant assets. The method also determines the company’s valuation if it is closed or sold.

Discounted Cash Flow

Discounted cash flow is one of the most effective methods to determine the company’s value. This approach considers the cash the business will generate in the future to calculate the company’s worth.

It calculates the cash flow the business is expected to generate regularly and rebates that into the net present value (NPV). This method also accounts for the various financial risks involved in your business or industry.

Valuation by Revenue

Valuation by revenue assesses the amount of money the business will generate in the future. This approach determines the current annual income and multiplies it by a specific figure to calculate the business’s worth. The multiplier is specific to each industry.

Get Professional Assistance

Business valuation is only compelling if you can accurately calculate business value of your company. This is why it’s in your best interests to get assistance from industry professionals, such as Cunningham & Associates. We can fact-check a rich profusion of information and combine techniques before providing you with a thorough estimate of your business value.

A professional evaluator will look at the right factors and study the recent comps and market dynamics. Our experienced business consultants will also examine your industry and compare results to ensure that the devised rate is right for your business. Professional valuators can also deliver accurate results quickly.

Business valuation enables you to get an insight into where your company is currently standing in the market. The figure helps you set goals and objectives, measure growth and losses, and create plans for improvements.

If you’re ready to get your business valued, get in touch with the experts at Cunningham & Associates. Our experts study every business component to provide you with accurate results. With our comprehensive services, you can make knowledgeable decisions to grow, expand, or sell your business.

Reach out to us today for your free consultation at (508) 797-5003.

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