How Much Is Your Company Worth?
Do you know how much your company is worth?
Business valuations aren’t just some bragging-rights figure – it’s an important number you’ll want to have on hand for a number of situations across the business lifecycle. Many small-business experts recommend you have a business valuation done every year, in fact.
Whether you’re forming an employee stock-ownership plan, raising capital or even selling your business, it’s important to understand what goes into a business valuation and how to value your own business.
So if you’re wondering, “How much is my business worth?” we’ll introduce you to some of the basics of small business valuations and how to get one.
Why Do You Need to Know the Value of Your Business?
The most obvious reason you would ever need a business valuation is in the event you sell your company. Should you ever get to the point where you want to cash out your business, it’ll be nearly impossible to do so – and extremely difficult to get a fair price – if you haven’t actually figured how much your small business is really worth. A business valuation, then, helps you establish a starting line (certainly not a ceiling!) for what to ask for if you’re actively seeking out a buyer, as well as what to accept from unsolicited suitors.
But you’ll want a dollar figure on your small business for other reasons, too, including:
- Simply setting a baseline from which you can set goals for business growth.
- Applying for and securing an SBA loan or other financing.
- Financial reporting.
- For tax purposes, including estate, gift and capital gains.
- Litigation issues.
Those are just a few of the situations in which a business valuation could come in handy.
What Is a Business Valuation, Anyway?
The textbook definition is pretty obvious: A business valuation is simply some sort of assessment to determine how much a company (or a part of it) is worth.
Howone goes about determining the value of the business is where it gets tricky, because there are three primary ways to do it:
- Asset-Based Valuation: This approach is relatively straightforward-sounding in that it pits the value of the company’s total assets against its total liabilities. (How things are valued is a different subject, and is complicated by the fact that it includes intangible assets such as patents and trademarks.) Still, this approach is so highly regarded that several standards, including the AICPA’s Statement on Standards for Valuation Services and the Uniform Standards of Professional Appraisal Practice, recommend analysts at least consider using it when evaluating companies.
- Income-Based Valuation: This approach uses different types of analyses to set a value for future profits that a business or an asset will generate. This requires forecasts for things such as revenues, costs and capital expenditures, and can be calculated in different ways – among common methods are Capitalization of Earnings, Discounted Cash Flow and Excess Earnings.
- Market-Based Valuation: This approach actually compares the market price of one company or asset to similar companies or assets that are either available for purchase or have recently been sold. You’ll frequently see this used in the stock market as it relates to publicly traded companies, which offer up regular financial metrics that analysts can use in comparisons. Examples include price-to-earnings, price-to-sales and price-to-book.
If those definitions sound complex and difficult to understand, it’s because they are – which brings us to the best advice we can possibly give you on this topic:
Never do a business valuation by yourself.
Business valuations are complicated undertakings in which millions, sometimes billions, of dollars are at stake – and most business owners simply don’t have the accounting and financial expertise necessary to get through the process. Instead, it’s vital to lean on experience.
McManamon & Co. is a trusted provider of business valuations for closely held companies, professional practices, partnerships, LLCs and other business interests. So regardless of the reason you need to know your company’s worth, you can turn to us for an independent, unbiased business and professional practice valuation.
Call 440.892.9088 or contact us online to get started.
Tags: business valuation, McManamon, small business | Posted in business valuation, McManamon & Co., small business