Do you know how much your business is worth? Finding an answer to that question can be elusive, but it is something you can uncover. There are a number of ways to valuate most any business, with some methods much better to use than others. Here’s how to put a price on your business and without regretting your decision later.
Your business may own property and equipment. The value of both plus your inventory is worth something. Moreover, it is worth a lot more to a prospective buyer who would otherwise start with nothing if she launched a business from the ground up.
Consider your business’ balance sheet when determining its worth. If your books are not up to date, then you should make everything current first. Then, review your assets and your business should be worth at least that much.
Another way that some people value a business is based solely on revenue. In other words, what you bring in each year is important to the buyer with everything else of secondary or little consequence.
Depending on your business model, a buyer may decide that paying three times your average revenue over the past five years is sufficient. So, if you made $50,000 in year one, $60,000 in year two, $75,000 in year three, $90,000 in year four and $100,000 last year, then you made $375,000 over five years or $75,000 per year on average. In this case a buyer might offer you $225,000 for your business: $75,000 x 3 years.
Other buyers may look closer at your profits above anything else. You can have all the revenue in the world, but if you aren’t turning a profit, then it may be difficult to command a high rate for your business. For instance, if the example business only turned a profit of $5,000 over the past five years and most of that profit was reached early on, then the buyer may worry that any profit could be sustained.
Cash Flow Analysis
You may need the help of an accountant here, but a cash flow analysis provides yet another way to valuate a business. Under this scenario a buyer would look at how much cash your business generates each year and project that amount into the future. However, she would discount the cash flow to tie in with the US Treasury bill interest rate.
For example, if your business is earning $5,000 per year and T-Bills are currently earning 4 percent per year, then it would take $125,000 in T-bills to get a similar return. The thinking here is that if you are looking to make at least a standard return on your investment, then T-Bills might be the better choice if a prospective business is unable to cover that spread.
There are other factors in any business valuation. These include: the number of years you have been in business, your customer base, location and goodwill. Pinning down a precise number can be a challenge and is something a potential buyer might challenge.
With the help of a business broker, you can come up with a valuation that you’re satisfied with and what a buyer might pay. It may not be rocket science, but it is a business science that an experienced broker will employ.