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How To Estimate Your Business In a Right Way: 5 Hints

Estimate Your Business In a Right Way

How To Estimate Your Business In a Right Way: 5 Hints

Looking for investors or planning to sell your business? The first thing you need to know is how to valuate your business.

Whether you’ve been in business for decades or months, valuating your company is not something you often do. But at some point, you’ll need to know the economic worth of your business. Chances are you’re not a financial expert, so how do you estimate the worth of your business?

Why You Should Know the Value of Your Business?

Business valuation estimates the economic worth of a company. It is a subjective assessment of both the financial and non-financial metrics of a business. It depends on many factors including revenues, cash flow, assets, and price-to-earnings ratio.

There are also non-financial aspects that can affect a business’ market value such as intangible assets, a strong management team, a desirable relationship with customers or suppliers, and a positive future for the industry. When selling a business, the negotiation skills of the seller or business broker can impact the final market value.

Knowing how to estimate a business properly is useful when you are buying or selling a company. But there are also numerous other reasons why you might need valuation figures, including:

  • Attracting investors
  • Securing funding from financial institutions
  • Applying for a bank loan with business as collateral
  • Determining the fair salary rate for employees
  • Understanding business financial status and growth
  • Expanding your business
  • Filing taxes
  • Establishing or reviewing existing business partnership

Ultimately, proper valuation ensures that you don’t sell the business short or oversell it more than its actual cost. Estimating the best value for your business is not easy. There are different valuation techniques – and it’s a good idea to use several methods.

Here are five business valuation techniques you can employ.

Price-to-Earnings Ratio (P/E)

Most businesses with an established track record of profits often use the P/E ratio or multiples of profit. This is the ratio between your company’s current share price and its earning potential. For example, if the P/E ratio of your business is 18 and earns net annual earnings of $100,000. Your business’ current valuation would be around $1.8 million.

Valuing Assets and Liabilities

Well-established businesses with sizeable assets often use this method. Usually, companies in the manufacturing and property sector employ asset-based valuation. With this method, you add up the inventory and assets and deduct liabilities. Assets are any real estate properties, equipment, or inventories that can be valued and liquidated. It also includes intangible assets like copyrights and intellectual properties. Meanwhile, liabilities are financial obligations or payables like bonds or loans. Businesses can easily get their worth by checking their updated balance sheet.

Discounted Cash Flow

This business valuation method relies on the business’ future projections; hence it often involves a complex process. Business Broker, Orlando recommends discounted cash flow valuation to businesses with predictable, established cash flow, like utilities and services companies. 

Discounted cash flow considers what the projected cash revenue would be worth today. To estimate your business’ worth, you will add the expected 15-year dividends plus a residual value after the term period. The current market value of the business is estimated using a discounted rate, which reflects the time and risk. Usually, the discount interest rate is fixed between 15 and 25 percent.

Revenue-based Valuation

You can estimate your business’ worth based on how much revenue it makes annually. Using the annual revenue, you can place an economic value on your business. Usually, the market value is pegged for one or two times its annual net worth.

Industry Standards

Acquisitions and change of ownership are more common in certain industries. Usually, these sectors have certain general principles that can be used when estimating a business’ market value. The value is based on some aspects other than sales or revenue.

Take for example the retail sector. Typically, retail enterprises are valued based on the number of loyal customers, their existing outlets, and business turnover. Potential buyers look at how they can reorganize the business and boost revenues.

These are five ways you can estimate the market value of your business. However, when you’re selling your business, many other factors come to play. Aside from the financial metrics, intangible assets along with negotiation skills can play a huge part. Working with experienced financial experts or business brokers can help you get the most out of your business.

Hopefully, these business valuation hints can help you come closer to understanding the economic worth of your company.

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How To Estimate Your Business In a Right Way: 5 Hints