There are several ways to determine the market value of your business. Here is a summary of methods that are used to assess the value of your business:
- Determine net asset value. Total everything owned by the business assets such as equipment (computers, machinery, tools) and operating supplies. Some properties may be difficult to value: such as policies and procedures, client lists, skilled employees, you and your skills, and established relationships that help the business, e.g., vendors and community relationships with organizations. What these intangible assets are worth may be hard to assess, but the value can be negotiated with a prospective buyer of your business. The next calculation is to subtract the debts and liabilities. The business’s balance sheet may be a good baseline for valuing the business, but generally, the business is likely worth more than the net assets.
- Analyze the Revenue. How much revenue has the business generated in annual sales? How many years of revenue do you have? The longer, the better. You may want to contact a professional such as a business broker (a professional that helps business owners sell their business) to help you learn what a business within your industry could be worth based on revenue as well as what other data you will need to determine an accurate marketable sale price.
- Earnings. Determine a multiple of the company’s earnings or the price-to-earnings (P/E) ratio. The P/E ratio, which is calculated by dividing a company’s current stock price by its latest earnings per share, is thought to be a reliable basis for valuing a business. For example, if the P/E ratio is ten and the estimated earnings are $200,000 a year, the business would be worth $2 million. The P/E ratio is likely a better valuing tool for companies with at least a few years of annual earnings. Profits are the metric that will be used to get to a reliable price-to-earnings ratio.
- Perform a cash-flow analysis. A cash-flow analysis (discounted) is a formula that looks at the business’s annual cash flow, projects it into the future, and then discounts the value of the future cash flow to today’s net present value. Here is a link to the Investopedia website with an explanation of the net present value and why you would use it in various investment situations; there is an (NPV) calculator at the site as well to help you determine your business’ net present value.
The model you should use to value your business depends on your circumstances. Some of the methods identified here may not be feasible for you because your business may not have the metrics for a particular method. It is important to know that when buying or selling a business, various valuation methods will not necessarily produce similar results. If you are interested in selling your business or valuing it to obtain financing, it may be worth finding a professional to help you. Asking a divorce lawyer for a recommendation may be a good source as they often need to use such professionals as part of a marriage dissolution.
Also worth mentioning this month is the Small Business Administration’s National Small Business Week 2-day virtual summit (free!) on Tuesday, May 2 – Wednesday, May 3, 2023.
This event is expected to include online seminars by experts, opportunities for networking, and a “mentoring lounge” where you can ask questions and get answers. The event is free to attend. Here is the link for more information about the event.
The information provided does not, and is not intended to, constitute legal advice; instead, all information is for general informational purposes only. This information may not constitute the most up-to-date information. Links provided are only for the convenience of the reader. A. Ferraris Law, PLLC, and its members do not endorse the contents of third-party references.
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