How To Estimate The Value Of Your Business
Deciding whether or not to sell your business can be a real challenge. There are numerous factors you’ll have to consider before doing so, including some that can be hard to quantify. But if you think that now might be the right time for a sale, then one of the first things that you need to do is figure out what your company is worth.
You don’t need to waste your time online searching for a business value calculator to accomplish this. Figures from sources like that typically are only reliable within a broad range of estimated value. Instead, you can figure out a likely business sale price range yourself. Keep reading to learn how.
Why estimate the value of your company?
How much is my company worth? It’s a question that business owners across the country often ask themselves. But how much do you really need to care about the number?
Entrepreneurs tend to care the most about their companies’ valuation in the lead-up to an impending sale. But knowing the value of your business is a good idea regardless of whether you plan on selling soon or not.
For example, business owners often have to provide an estimated value of their company when they apply for a loan. Similarly, you may need to have a valuation handy if you plan on seeking outside investment anytime soon. That’s why it’s a good idea to update your business value calculation every so often.
Strategies for calculating your business sale price
There are several different ways to go about calculating the estimated value of your business. In fact, the process is a bit more open-ended than you might think.
There isn’t really a single agreed-upon formula for determining how much your company is worth. Rather, you have to take into consideration a variety of things when coming up with your valuations. Here are a few different ways that you can do this.
Assets can play an important role in determining how much some companies are worth. So one strategy that you can use is tallying up the value of your company’s assets. This is a pretty simple calculation.
Figure out the total current market value of all of the equipment, inventory, and property that your business owns. Then subtract any debts or liabilities that you have outstanding. What you’re left with will be the net value of your company’s assets.
However, most companies are worth far more than the total value of their assets. So think of this calculation as a good starting point for your valuation, but not the final number that you should expect to fetch in a sale of your company.
Another way of valuing your company is to look at the amount that it generates in annual sales. A general rule of thumb is 1X revenue is the value...but it is actually a highly inaccurate measure of value because of the variability of profit margins between industries.
Earnings multiples are a more accurate way than gross revenue multiples to estimate your company’s sale price. After all, future net earnings--the net cash flow after all expenses that buyers expect to receive from owning the company--are what buyers actually pay for. The most commonly-used measure of net earnings is EBITDA--earnings before interest, taxes, depreciation, and amortization.
To calculate your company’s EBITDA, take net profit from financial statements or tax returns for the last three years and the most recent year-to-date period. Then, add back to that number the expenses recorded for interest, taxes, depreciation, and amortization.
The next step, called normalization, is to make adjustments for one-time or non-recurring events, and costs that aren’t at the normal market level. For example, if you changed locations last year, the moving expenses (unlikely to happen again in the next few years) can be added to EBITDA.
If you rent space or equipment at below-market rates from yourself or another company you own, you’ll need to subtract from EBITDA the difference between what you paid and a true market rate. Normalization is a complex exercise best performed by a professional valuator or merger & acquisition advisor, but on your own, you can get to a reasonable value for preliminary estimating purposes.
You’ll then need to get a figure for an average multiple of EBITDA paid for your type and size of company--which can be obtained from a business broker, accountant, or online sources. Multiply your normalized EBITDA figure by a market-level EBITDA multiple, to estimate what your company is worth.
Discounted Cash-Flow Analysis
You might also use a discounted cash-flow analysis to come up with your company’s valuation. This is a pretty complex formula that will require some time to calculate.
Essentially, you’ll be taking your company’s annual cash flow (normalized EBITDA) and projecting it into the future. Then you’ll discount the value of your future cash flow by using a “net present value” calculation. You can find a tool that will do this for you by searching for an “NPV calculator” online, or in the Help function of your Excel or another spreadsheet program.
Other Factors to Consider
Numbers are always going to be the most important thing when determining how much a company is worth. But there are factors besides them that you should also be thinking about.
For example, your company’s geographic location may add some value to it. Similarly, the strategic significance of your company to a would-be acquirer could increase its valuation. Make sure that you’re thinking about these types of things too before you settle on a final estimated value for your company.
The bottom line: How much is my company worth?
If you want to figure out how much your company is worth, then you need to consider its assets, annual earnings, earnings multiples, and other key financial and non-financial indicators. Use the strategies discussed above to figure all of this out.
Once you have that information, you might want to try comparing it to other companies in your industry that have recently been sold. This can help you get a better sense of where the market is at when it comes to acquisitions in your sector.
Because ultimately, your company is only worth what someone else is willing to pay for it. And, if you are planning to actually go to market and sell your company, consider retaining an expert in selling companies, such as a merger and acquisition advisor. Those advisors can accurately estimate market values and--perhaps more important--advise you on steps you can take to increase your company’s value before you go to market.