What is The Rule of Thumb for Valuing a Business?

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Selling a business is a complicated process that involves doing a significant amount of research. Since business owners rarely have sufficient time to deal with the sale, they often hire business brokers to do the job for them.

An experienced business broker who knows the market can provide valuable assistance in determining the cost of a business. The value of a company depends on a variety of factors, including its profitability, market condition, state of the economy, and much more.

Let’s take a closer look at how to value your company before putting it out on the market.

Things to Remember When Valuating a Business

The first thing a business owner should remember is that there isn’t an exact formula for evaluating a company. Since each business is unique so is the valuation. Other things to keep in mind include:

  • The best way to get an accurate valuation is to work with a professional business appraiser, a business broker, or an investment banker.
  • No matter how accurate and fair your business valuation is, it doesn’t mean you are going to find a customer who is willing to pay this price.
  • You should be evaluating your business at least once a year.

Whether you are planning to sell a business today or in the future, it’s imperative to be prepared for the sale at all times. This doesn’t just mean determining the price tag. It involves keeping your company in top shape to get the best deal for it.

Data You Need to Perform a Valuation

To perform a precise valuation, you will need the following information:

  • Financial records – financial information (revenue, debts, expenses) plays a vital role in determining the company’s value.
  •  Staff experience – employees with a strong record affect the company’s value in a positive manner.
  •  Market conditions – state of the economy, interest rates, and average salaries must be considered. For example, an economic slump could cause your company’s value to plummet.
  •  Assets – the cost of intangible and tangible assets must be considered for a clear picture of your business’ worth.
  •  Company size – the larger the company, the more it’s likely to cost.
  •  Competitive advantage – if a company has a competitive advantage, its value increases.

Here are a few tips to help you evaluate a business with the above information in mind.  

1. Look at the Value of Assets

One of the most important elements of your business’s worth is the assets it owns. This includes real estate, equipment, and inventory. To get a clean figure, you need to subtract any debts and liabilities. For example, if you are paying a mortgage on an office, you shouldn’t consider the property an asset. At least not entirely.

2. Consider the Revenue

How much does your company generate in annual sales? Once you have this figure, you can study the market and find out what an average business with similar annual sales is currently worth.

This information is rarely available online. According to Orlando Business Broker, business owners try to keep their plans for selling companies private. That’s why you will probably need a business broker’s assistance to get the figures.

Look for multiples. For example, a business in your industry can be typically worth 1.5 times the amount of annual sales.

3. Future Earnings Multiples

Another figure to consider is the multiple of the company’s earnings or the p/e (price to earnings) ratio. Figure out what your company’s earnings may be in the coming years. If a typical p/e for your industry is 10 and your estimated earnings are $100,000, the cost of your company could be $1 million.

4. Discounted Cash-Flow Analysis

Discounted cash flow (DCF) analysis is a method of valuing a business based on its current worth and projected cash flow. The analysis is performed by building a financial model. It requires a comprehensive approach to business data and value analysis.

Performing a DCF analysis can be complicated if you don’t have experience with this type of valuation method. That’s why it’s important to get professional assistance.

Taking advantage of this analysis can give you one of the most accurate valuation figures.

The Takeaway

Valuating a business is a complex task that requires extensive knowledge of the market, access to all the necessary records, and professional assistance.

It’s important to remember that the value of your company is fluid. It can fluctuate depending on many factors, including the state of the economy, interest rates, industry developments, competition, and much more.

By evaluating your company regularly, you can be ready for selling it at any time.

Thanks For Reading 
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