A business valuation is a process which estimates the monetary value of an organization. It is important for financial reporting as well as other purposes like splitting shares or selling your business the entirety of it, making succession plans, and getting financial aid.
The value of a business can be based on assets and earnings, or market potential. The most common methods to evaluate a company’s worth include the multiples of earnings or times-revenue method as well as the discounted cash flow technique.
The times-revenue or earnings-multiples method multiply your company’s revenue or earnings by an industry standard to come up with a figure. This is a reliable method of estimating the value of your business, but it does not necessarily give the complete picture. A cafe that is earning $250k per year, and is valued at five times that amount, could be worth more if the establishment has an established brand name or a high quality dining experience.
Another common method is the formula for book value. This method adds all your assets like real estate, equipment and inventory, and removes liabilities that are due debts and loans. This is a simple and quick procedure, but it might not accurately reflect your company’s real worth, particularly when you consider the growth potential. Investors and buyers are often more concerned about the potential for future profits than your current assets. This is why it’s beneficial to conduct a complete valuation, for example by an appraiser or broker before pursuing investment from outside.