How to Correctly Value a Business

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Whether you want to buy or sell your business, or if you are simply curious about how well your business is doing, it helps to have a good understanding of its actual value. Often businesses find that the value they place on themselves is different to that of banks or investors. So how exactly do you value a business correctly?


Figuring out the right valuation method

There are actually a number of ways to value your business. How you value yours will depend upon a large number of factors. These include the type of business you are running, your assets, how established the business is in your market and numerous intangibles. It is the intangibles that really make it difficult.

According to Bloomberg, the three main valuation methods include examining your assets, cash flow and researching the prices of other similar businesses to yours. Asset valuations are often used by businesses looking to sell pretty quickly. They basically add up how much the company’s assets are worth and then deduct any liabilities. What they don’t do is look at future profit potential, which means undervaluing an asset.

Cash flow is a typically best used by companies that are already pretty well established. It looks at the profits made year by year and also calculates potential future profits. If your business is quite new, it’s very difficult to prove how well it could do in the future when there is no history to back it up. This often leads to figures that are wildly inaccurate.

Looking at prices of businesses similar to yours can be a good starting point. However, you need to take into account anything that makes their business unique. As mentioned on the Small Business website, anything that sets your business apart from the competition can increase its value significantly.

The truth is, valuing a business by yourself might be possible but it is complicated, hard work and you will only ever have a rough idea of what the actual value is. That’s why it is a good idea to seek help from a professional valuation service.

How a professional service can help

Professional valuation services can take the headache out of trying to do the calculations yourself. The experts involved in this practice have years of experience valuing businesses just like yours. Therefore you are guaranteed to get a much more accurate value than if you were to work it out yourself – and an honest appraisal from someone outside your operation. A business valuation cpa, for example, takes into account every single variable that will affect the value. They know what to look out for and can help solve any discrepancies you may have between your valuation and your bank’s valuation.

Valuing your business is important if you want to know how well you are doing and essential if considering a sale, merger or are looking to find investors. Knowing the actual value of your business can tell you how successful the business has become and whether there is room for improvement.

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