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A business valuation is an approach that estimates the monetary value of an enterprise. It is important to report financial information and other purposes, such as dispersing shares and selling your business some of it, making succession plans, and getting financial aid.
The value of a company can be determined by its assets, earnings or market potential. The most widely used methods of valuing a business are the earnings-multiples method or times-revenue and the discounted cash flow (DCF) method.
The method of times-revenue or earnings-multiples is a method of taking your business’s revenue and earnings and then multiplies it by an industry standard multiplier to calculate an estimate. This is a great way to get an idea of what your company is worth but it doesn’t necessarily give you a complete picture. A restaurant that earns 250k per year and is valued five times that amount, could be worth more if it’s run by an established brand or high quality dining experience.
The formula for book value is another method that is used widely. This method adds the assets of your business including equipment inventory, real estate and inventory and subtracts liabilities which include outstanding loans and debts. This method is simple and simple, however it may not reflect the true value of your company, especially if you are looking at the possibility of growth. Buyers and investors are typically more interested in the possibility of future profits than in your current assets. This is why it’s a good idea to conduct a full valuation, such as by an appraiser for business or a broker before pursuing investment from outside.
