Articles

How to Value a Business | What is My Company Worth? / Valuation

date posted

02/26/21

read time

6 Mins

Business Valuation Simple Formula

There are two distinct types of business valuation available to businesses. One is financial valuation which measures what a company is worth based on its financial records and assets and liabilities. The other type of business valuation is intrinsic value, which measures what a company is worth by looking primarily at what a company will bring to the market in return for its shares or ownership in a business. In this article, we will discuss the differences between financial and intrinsic value and how to value a company using either method.

Business Valuation Simple Formula

Unlike relative types of valuation that examine similar companies based on their financial records, intrinsic value measures what a business is really worth by looking primarily at what it will bring to prospective buyers. To value a business this way, you will need to obtain information such as what the business is worth to buyers (the price per share or equity) and what potential buyers are willing to pay for it (the price per share or equity). This information is used to determine an amount (the intrinsic value) that you will pay for the business if you were to purchase it.

Contractor Construction Business Valuation

Determining Operating Income and Cashflow

Using the information on the business’s operating income and cash flow, and its debt and assets, a business broker can provide you with an idea of what a business is worth. The business broker will then use the data on these two items along with market data, current price per share or equity, and projected earnings to come up with a figure for what is my business worth.

Earnings Method for Valuation for a business

Use several online valuation calculators and triangulate the real value

The method of valuation you choose to use will depend on what it is you are trying to determine as the value of the company. If you want to determine an exact dollar amount for the company, you can make an educated guess as to what it may be. However, if you want to value the company using the method of economic depreciation, you will make an educated guess as to what it may be worth at a certain date in the future. Determining what is my company worth will require using numbers and information from several different sources and should be done by a trained individual.

One of the first things a valuation calculator can tell you is how much the business is worth. This information can be very useful when you are trying to sell a business. You can calculate how much you should offer your buyer for it based on how much money you make with the business each year. Likewise, you can determine how much you should give your buyer based on how much money you make with the business each year. Knowing both of these values will help you decide how much money to offer for the business.

 

  1. CalcXML – This calculator looks at your business’ current earnings and expected future earnings to determine a valuation.
  2. EquityNet – EquityNet’s business valuation calculator looks at a variety of factors to create an estimate of your business’ value.
  3. ExitAdvise – ExitAdviser’s calculator uses the discounted cash flow (DCF) method to determine a business’ value.

Consider who would really want to purchase the business

The second part of how to value a business is determining how much the business is worth to prospective buyers. A business valuation will take into consideration the type of business you have, your age, the number of years you have been trading, the cost of buying and maintaining your equipment, and your market value. It will also take into consideration the amount of debt you have and the amount of equity you have accumulated.

  1. Angel Investors –  (Also known as a private investor, seed investor or angel funder) is a high-net-worth individual who provides financial backing for small startups or entrepreneurs, typically in exchange for ownership equity in the company. 
  2. Venture Capitalists  – A venture capitalist (VC) is a private equity investor that provides capital to companies exhibiting high growth potential in exchange for an equity stake. 
  3. Private equity firms – A privateequity firm is an investment management company that provides financial backing and makes investments in the private equity of startup or operating companies through a variety of loosely affiliated investment strategies including leveraged buyout, venture capital, and growth capital.

Accredited valuation agencies

It is best to use an accredited valuation agency, which is highly trained to do this kind of calculation for its clients.

Check out this article: How to find an accredited valuation company from Mercer Capital!

Net present value method = balancing the current value of all future cash flows generated by a project against initial capital

You will also find business valuation calculators that use a different method of measurement than the income approach. Known as the net present value method, the income approach uses future income streams to estimate the value of a business’s assets. Using a net present value approach gives a more accurate answer to how much your business is worth. The downside to this method is that it is more complicated and takes longer to complete.

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Don’t go it alone – there’s professionals for this reason. This is a full-time profession (business valuation)

When using business valuation software or services, it is important to make sure you are getting an actual value of your business rather than an estimate. Estimates can be misleading because they don’t take into account all the different factors that can affect the value of a business. Many companies think their financial data is good enough to allow them to do their own business valuation and get a fair price for their business. However, in reality, very few companies have the level of knowledge and expertise needed to do a true market value analysis of their business. It would be best to leave this job to experts who know what they’re looking at and how to calculate the correct values based on their data.

Cashflow / Income Approach vs. Net Present Value Approach

Learning how to value a business is more complicated than it sounds. Basically, there are two types of valuation methods: The cash flow or income approach and the net present value approach.

Most companies prefer the income approach because it takes into account the capital assets a company has, while not taking into consideration the long-term liabilities the company has. Using this type of valuation will give you a fairly accurate picture of how much your business is worth.

On the other hand, the net present value approach will give you an idea of how much your company is worth when all the liabilities and assets are taken into consideration.

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