This question pops up ” how much is your business worth?” in our mind when it comes to buying, selling, or expanding a business. Finding out the value of your business provides a deep insight into its financial health helping you to secure investment and make effective business decisions. However, valuing a business can be challenging. But, no worries! We have come up with a solution. In this short blog, we’ll have a look at how to value a business and what are the valuation methods to work out the value of a small business.
Factors That Affect Business Valuation
You can easily value some parts of a business while there are many factors that affect this valuation. These include:
- The reputation of a business
- The worth of the business’s customers
- Circumstances during the valuation process
- Trademarks of the business
- Business age
- Team strength
- Product type
These factors (intangible assets) affect the business valuation and make it complicated to get an accurate business valuation. However, there are many ways you can use to get an accurate business value.
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How to Value a Business Using Different Methods
There are a number of ways to find out the value of your business. Here is the list of methods used for business valuation:
1) Entry Cost Valuation
In this method, the valuator uses the figures of an already existing business that is similar to yours to work out new business value. This method takes into consideration the total set-up cost, cost spend on building a customer base, tangible efforts, training employees and developing products.
2) Asset Valuation
This method best suits those businesses that are stable and have a bulk of tangible assets. This method takes into account the NBV (Net Book Value) of a business and business assets after considering the depreciation.
3) Discounted Cash Flow
This method is more complex than all other business valuation methods. It best suits well-established businesses that have a predictable cash flow. It relies on assumptions about a business’s future estimating the worth of future cash flow today.
4) Industry Rules of Thumb
Businesses like recruitment agencies, accountancy firms, and those that deal with buying and selling consider certain rules of thumb as a guide. These rules of thumb can be factors like business turnover, its customer base and outlets that a business contains. With these rules of thumb, one can calculate the value of a business.
5) Price to Earnings Ratio (P/E)
Price to earnings ratio or multiples of profit method is commonly implemented by those businesses with an established financial history/profit. Based on the estimated profit growth and consistent earning history of a business, this method calculates the business value. And, it indicates whether a business has a higher P/E ratio or not.
How to Secure a Good Business Valuation?
There are many ways to improve different areas of your business. Here are some points that you can use to secure a good business valuation:
- Focus on planning: With a solid business plan, you work on accomplishing both the short and long terms goals of your business.
- Reduce business risks: You can use multiple ways to mitigate the possible business risk like diversifying your customer base
- Implement great processes: You need to create strong processes that work well, even in your absence.
- Seek advice: It is always advisable to consult a valuation expert while selling or buying a business. As it is one of the crucial moments of your life, so taking professional advice from our accountants is worthwhile.
Hopefully, after reading this post, you have got a better idea of how to value a business and different valuation methods. You can use these valuation methods as per your industry type and it is preferable to use multiple methods to get an accurate business value. However, you need to make sure that your business is mature enough to be valued for getting accurate insight into its worth.
Disclaimer: This blog is intended for your general information on business valuation.