Key takeaways for “3 Proven Ways To Determine The Value Of Your Business”:
- 3 ways to help determine the value of your business
- Why certain approaches may not be suitable for your business
- Using multiple forms of analysis to come up with fair value
3 Ways To Determine The Value Of Your Business
Owning a business is a dream that many people have. When most people start a company, they could only dream of it being so successful that they earn a sizable income and develop something that is worth a lot of money. At some point of the business ownership cycle, there could come a time in which you need to determine the value of the business.
Whether it is to sell the company, raise capital, or take out a loan, having a keen understanding of your business valuation is very important. While many people will eventually need to understand the value of their business, the process of determining the value can be rather complex. Fortunately, there are three processes and tips that you can follow that could help to determine the value of your business.
Asset Based Approach
One of the most common ways that someone will value a business is by starting with the asset-based approach. This is often considered one of the more simple ways to value a company as all it is doing is assessing the value of each underlying asset and then combining all assets to determine the true company value.
This process will often require a lot of work to appraise the more significant assets, which could include heavy machinery and equipment, inventory, accounts receivables, and even real estate. Another asset that can be harder to quantify is the value of the relationships and future income streams that are attached to a growing list of clients.
Finally, the income approach is a common way to come up with the value of your business. With the income approach, the assessment will involve diving deep into your financial statements to determine your true adjusted revenue and after-tax income. It is also very common to apply a multiple to both of these figures to come up with the final value. The multiple that is used is often based on multiples that were applied to the sale of companies that were in the same industry.
While stabilized companies that have a long history of operations can be valued by using historical income statements and tax returns, it can be harder to value a company using this method if they are in the growth stage. Companies that are continuing to grow and have spent a lot on marketing and customer acquisition costs may not have a very positive bottom line. However, the potential that they provide can give a lot of optimism to someone that is looking to invest in a company. Due to this, it is also common to apply some form of multiple on reasonable projections for the company moving forward.
No matter what you are planning to do with your business, knowing the true value of it is very important. While it can seem like a rather complicated process, it can be achieved if you follow these three tips and processes. It is also possible that you may need to use multiple different forms of analysis and business valuation assessments to come up with the fair value.