A business valuation is a process that determines the value of an organization. It’s crucial to report on financials, dividing shares in the event of selling all or a portion of your company, creating succession plans and getting finance.
The value of a business can be determined by its assets, earnings, or market potential. The most widely used methods of measuring the value of a company are the times-revenue or earnings-multiples method and the discounted cash flow (DCF) technique.
The times-revenue-or-earnings-multiples method multiplies your business’s earnings or revenue by an industry standard to calculate a value. This can be a great method to get an idea of what your business’s worth but it doesn’t necessarily give a full picture. For instance, a cafe which earns $250,000 annually and is valued at five times its earnings could be worth more with a strong brand and a top-quality dining experience.
Another popular method is the formula for calculating book value. This method adds up all your assets such as equipment, real estate, and inventory and subtracts liabilities that are outstanding loans and debts. This is a straightforward and quick procedure, but it might not accurately reflect your company’s actual worth, particularly when you consider the growth potential. Buyers and investors tend to be more concerned about your future profits than the current assets. This is why it’s important to run a full valuation, such as that of an appraiser for businesses or a broker prior to seeking out investment from outside sources.