It’s often said that a business is only worth what someone is willing to pay for it. But how will you know if what someone is offering is worth your time without you yourself knowing how much your business is worth? There’s no single formula that can be applied to determine a precise value for each and every private business. However, there are ways to estimate a relatively accurate figure.
A business or company valuation is the general process of determining the economic value of a whole business or company unit. The economic value of a business is the measure of the benefit from a good or service to an economic agent—the maximum amount of money someone is willing to pay for said good or service. A business valuation typically includes an analysis of the company’s management, its projections for future earnings, its capital structure, or its assets’ market value.
In order to maximize your payout when selling your business, it’s advisable to work with an experienced M&A advisor and business valuation provider. However, it’s also important for you to know the ins and outs of a business valuation so that you know your company is being treated fairly.
Methods of Business Valuation
There are several ways that a company can be valued. Here are some of the most commonly used methods.
This is the simplest way to conduct a business valuation. It’s calculated by multiplying the company’s share price by its total number of shares outstanding.
Times Revenue Method
The times revenue method utilizes a stream of revenues generated over a given period is applied to a multiplier dependent on the economic and industry environment. For instance, a service firm may be valued at 0.5x revenue, whereas a tech company may be valued at 3x revenue.
The earnings multiplier method provides a more accurate figure for a company valuation than the times revenue method. This is because sales revenue isn’t as reliable as an indicator of financial success as a company’s profits are. With the earnings multiplier method, you adjust future profits against cash flow that could potentially be invested at the current interest rate over the same period. In other words, the current P/E ratio is adjusted to account for current interest rates.
Discounted Cash Flow Method
The discounted cash flow method is similar to the earnings multiplier in that it is essentially based on projections of future cash flows that are adjusted to get the current market value of the business. The primary difference between the two methods is that the discounted cash flow method accounts for inflation when calculating the present value.
We are a leading M&A business advisor that provides professional business valuation services. Our team of experts has decades of experience successfully conducting precise and thorough business valuations for our clients.
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